Hope for the best, and prepare for the worst. But what if we can’t do both?
With proper planning, you don’t need to worry about your retirement; you’d probably enjoy it even more by supplementing your pension.
Take a quick scan in this article to know more about:
- Why People Use Their Property as a Pension Supplement
- The Ways You Can Make Use of Your Property To Supplement Your Pension
- The Other Things You Should Consider When Using Your Property as a Pension Supplement
We want nothing more than for you to enjoy the rest of your retirement days. As experts in the field, we have dedicated our lives to make yours better.
Creating a concrete plan now can set the difference between living a comfortable life and living a luxurious life. Take the first step and read the article below.
No more nine-to-five1, no more double shifts, no more extra responsibilities, just free money without breaking a sweat; Admit it; these are what we first think of when we talk about retirement.
But what if the money isn’t free? Suppose you had to be retired for ten years; how will you survive? And what if the pension doesn’t come in until a year after your retirement? Will it ever come at all?
What if there are changes in government policy that lead to a decrease of funds available on retirement? These are just some of the questions many have about retirement.
If you have a property, the solution is to use it as pension support.
Why Use Property as a Pension Supplement?
The high costs of living today can quickly drain your savings and investments, bringing them down faster than you expected. When the time comes that you have to stop working, how will you cope with inflation?
Using a property as a pension supplement gives you access to an income source that constantly increases the value at 2-4% per annum, depending on the property market2.
Having a property can do much more than give you an extra income when you retire. It also allows you to take advantage of various tax deductions, which means that your taxable income will be reduced when you use it for pension, making your finances 65% more efficient.
Finally, it can prepare you for an uncertain future. Today’s economic environment is unpredictable, and with the changing trends in government policies on pension schemes and benefits, it pays to diversify your income streams as much as possible.
This not only ensures that you will have a good quality of life when you retire, but it also gives you more free time to spend with your family and do the things you want to.
Ways to Use Your Property as a Pension Supplement
Retiring today is more complicated than it was two decades ago because of inflation3. When we retire, our money needs to keep up with inflation so that our savings aren’t depleted fast.
Using a property as a pension supplement is the most practical solution to pre-retirement problems. The income from the rent that you collect will continue even after retirement, and with proper management, you can reinvest this money into another profitable investment.
There are several ways that property can supplement your pension:
Rent Out Your Property
The first and most common way is to use the rental income from the property to generate extra income for day-to-day costs like heating bills, food shopping, and mortgage repayments.
Money earned from renting out the property can then be put into tax-efficient savings plan to supplement pension income later in life.
Invest In Other Properties
This method is more suitable for those who have at least one or two properties in their portfolio. By borrowing against your original property, you can then use this money to invest in other properties that promise higher returns, like student and buy-to-let4 units.
The great thing about this strategy is that you can also use the rental income from your original property to support the repayments.
Sell Your Property
Using property to supplement pension can also mean selling your property and investing the money into a tax-efficient savings vehicle. This will give you good returns from capital appreciation and rental income, giving you extra income for daily living expenses and future investments when you retire.
This strategy works the best if you live in a property that has appreciated significantly in value.
Another way to use the property as a pension supplement is through inheritance. If you have money left over from an inheritance, it can be added to your pension fund and give you access to the same benefits as when you made the original payment.
If you’re approaching retirement and looking to downsize5 or release capital from property investment, use this money to supplement your pension.
Downsizing can also help with the associated costs of moving home, such as solicitors’ fees and estate agent charges. This will also allow your pension savings to grow and continue as a source of income after retirement.
Future Worth of Your Property
Another option is to consider using future property value growth. If you have a buy-to-let investment that has seen promising returns over the years, use this capital as a deposit for another property and rent it out rather than selling your original home.
This will ensure that you can supplement your income throughout retirement while staying in the same home.
Equity release schemes allow you to unlock the value of your home and use it as an income. This can be done by taking out a loan from the equity in your home or moving to a smaller property and using any capital gain6 towards pension savings.
The main advantage of equity release is that the pension contributions from your property will be tax-efficient, meaning you can get more for your money by using this method.
Technicalities To Consider
While the property may seem an attractive way to supplement a pension, you need to understand the risks involved.
There are several things that you should consider when using the property as a pension supplement:
- Capital Gains Tax7
Relying on a capital gain from your home could prove risky if there was a change in the market or the value of your home dropped. This could result in a substantial shortfall and impact your pension fund.
When assessing how much risk they are prepared to take on board, lenders will consider how likely your rental income is to cover the ongoing costs of running and maintaining the property.
- Existing Pension Contributions
Using property as a pension supplement could impact existing contributions. This is because you will be receiving tax relief on these payments, so using your property to fund your retirement could reduce the amount of money left for such payments.
When assessing how much they are willing to lend, lenders could ask for evidence that you have made any existing pension contributions on top of the additional loan repayments.
Some people choose to use their home as an inheritance8 for family members and take out a loan against its value to supplement their retirement income.
Retaining your home as an inheritance can mean that you will be unable to downsize or go on long holidays, as the money from selling it may not cover the costs associated with moving somewhere smaller.
- Tax Implications
Using property as a pension supplement might not be suitable if it meant that your annual taxable income, including state benefits, was over £100k, as this could impact your future entitlement to certain state benefits.
Using your property as a pension supplement will mean that any income you received from it would be taxable.
You may also need to pay National Insurance contributions9 on this income, depending on how you use the money and what type of scheme you choose.
- State Benefits
If you’re self-employed or have a self-employed partner, you will have to pay Class 4 National Insurance contributions10.
Otherwise, if your taxable income (including pensioners’ State benefits) exceeds £100k a year, this could reduce the amount of money you receive in certain state benefits like Universal Credit or Pension Credit.
You could be required to cover this personally if your partner’s business doesn’t generate enough income to cover the cost of paying these contributions.
- Pension Plans
The use of a property as pension support will depend on the type of scheme you choose.
Drawdown plans allow you to take your savings and income from them as and when you need them.
However, a Retirement Annuity plan is designed so that savers receive an income at some point in their retirement – usually for the rest of their lives.
Regardless of the method you choose to make use of your property as a pension supplement, you should take into consideration your current income, budget, and family situation, as well as the expected rise in property prices before you make a decision.
Can I Supplement My Pension With Property?
You can use your property as a pension supplement to increase your retirement fund, but you must ensure that this is a long-term solution and not just a short-term fix.
Is Supplementing My Pension With Property Tax Effective?
Using your property as a pension supplement could be effective if it meant that you’re able to take your retirement savings on top of what the state offers.
You should be aware that the tax implications for this type of investment are potentially quite high and you must ensure that your property’s value will increase over time.
What Does Supplementing My Pension With Property Mean?
Supplementing your pension with property means that you invest the capital in your home into a private pension fund and take an income from it later in life.
This is to supplement any state benefits or other retirement funds you have, which will mean that you’re able to enjoy a more luxurious lifestyle.
Is Supplementing My Pension With Property Affordable?
Yes as long as you’re willing to make the necessary sacrifices. Lenders could require that you have evidence of additional pension contributions from your own finances before they will agree a loan for property.
The value of the property as a pension supplement can vary depending on your personal circumstances.
While using the property as a pension supplement can be an attractive way to build up your retirement pot, you need to consider how it could affect your other pension savings and investments.
You should also think about how it might affect your existing income and if it means that the money you receive from any state benefits will reduce.