At face value, this is a sensible move; however, it is important to remember the various costs that can be incurred with buy-to-let properties.
For example, individuals will likely need to invest in landlord’s insurance, maintenance fees for wear and tear, property management and even decorating and furnishing the property.
Further to this, there are also letting fees to consider, which can fall somewhere in the region of 15 per cent, as well as the likelihood of void periods where the property is vacant.
All the above can eat into property pension assets. However, these are not the only risks that can be incurred.
Potential risks
Given the current state of the UK property market, the appeal of property investment is understandable.
Indeed, many investors view such investments as a two-pronged source of income: the long-term capital growth as property prices continue to rise, as well as earning rental income. However, such gains on investment are not guaranteed.
Property, like any other investment, can rise and fall in accordance to market fluctuations. As such, the cost of their property can plummet when faced with market volatility – a recession, for example, would be more than enough to cause a crisis in market confidence.
This can, in turn, make negative equity a possibility, when the property owner has ultimately paid more money for the property than it is worth.
Of course, if an individual is happy to wait out the fluctuations until the markets stabilise, this is seldom an issue. However, it can present problems for those who are solely dependent on the value of their property to fund retirement.
Indeed, such individuals may not have a large enough pension pot to fall back on. Others may not be prepared to wait months, or even years, for normality to resume.
This can result in people selling their property, accepting the loss, and cashing out of their investment before the property value falls further.
Unfortunately, this highlights an even greater problem with dependence on property to fund retirement: illiquidity.
Illiquid investments
Given that the investment cannot be quickly converted into cash, at least for fair market value, illiquidity may pose significant barriers to prospective retirees.
This may not seem like much of a problem when an individual is in their 40s and some way off from retiring. However, those who are at or near retirement age will find it extremely difficult to access their cash wrapped up in their property, making them asset rich, but cash poor. As such, they could find themselves struggling to afford their lifestyle in retirement.
