Saving for retirement

Relying on property, an inheritance or the State to fund your retirement? We look at the pros and cons.

There's lots of confusion surrounding the best way to fund your retirement. Although it may seem like a long way off for some, the key to financial stability in the future is all about clever pension planning right now. After all, retirement is a time to enjoy life, not worry about money.

Investing in property

Profit from property is often at the heart of many retirement plans. In the past, people have opted to invest in a buy-to-let property or downsized to a smaller property in the hope that they will be able to live off the rental income or the capital they release by downshifting.

But if you look at what's happened to the housing market in the last decade, the statistics show that property may not be as profitable as you thought.


A number of metrics suggest that UK housing supply remains low relative to demand. House prices are still fairly high relative to peoples’ incomes, at least by historic standards even though declining(1).

This means that properties are becoming harder to sell and that it's harder to achieve the asking price. On the plus side, though, if you are mortgage-free, you could release a significant amount of capital if you downsize.


If you are relying on a buy-to-let property to fund your future, you need to consider occupancy rates. Between lets, or if you need to carry out maintenance, your property could be empty for one or two months of the year. You won't receive an income for your property during this period, so you need to take this into account if you rely on this money to pay the mortgage on the property.

Capital Gains Tax (CGT) will also affect how much money you make from selling a property that's not your main residence. Under current tax rules, if you're selling a buy-to-let property or holiday home you'll have to pay CGT at the highest rate (28% if your income exceeds the basic rate tax band, currently £35,000) when the property is sold.

Releasing equity

Many people hope that they are able to release equity from their properties to fund their future lifestyles, and while this can be a great way to make the most of the money you have built up in your property over the years, there are some risks.

Older homeowners can take advantage of equity release schemes such as lifetime mortgages (where you can borrow up to 50% of your property's value) and home reversion schemes (which allow you to sell all or part of your home to an equity release company). However, both methods expose you to expensive interest repayments and unnecessary debt.

While releasing equity could mean that your beneficiaries lose a portion of any inheritance, it can also reduce the value of your estate, which also reduces the amount of inheritance tax payable.


  • A buy-to-let property in a good location could provide a steady income stream and is an asset that you can sell.
  • If you are mortgage free, and you've owned your main residence for a long time, you could release a significant amount of capital if you downsize.


  • The property market hasn't performed well over the last few years.
  • Buying and selling property is expensive (there are legal fees, stamp duty and CGT to pay), and it can't always be sold quickly.
  • If you haven't paid off a mortgage on your main residence or holiday home/buy-to-let you will still have significant outgoings to cover on a retirement income.

Banking on an inheritance

An increasing number of adults are relying on inheritance from parents or relatives to fund their own retirement. But as the older generations reach retirement, it's important to remember that they still need to finance their own lifestyles.

And with life expectancy rates on the up, you may even have two generations of retirees in one family, relying on non-existent inheritance funds. Figures show that 31% of adults expect to inherit money to fund their retirement, but only 14% have discussed inheritance with their families and are clear about what they will receive. (*Figures: Friends Provident).

You also need to take into consideration medical and long-term care, which could cost about £39,000 a year. The costs soar to about £57,200 if the care home also has nursing facilities(2). So, if you're relying on your inheritance to fund your own future, you may find there's little, if anything left.


  • Receiving money through inheritance could help with your financial planning.
  • It's windfall money that you haven't earned yourself.


  • Increased age expectancy means that more people will spend most of their money during their lifetime or to fund care fees.
  • Inheritance tax at 40% is payable on the value of an estate over £325,000.

Longer-term goals

As life expectancy increases people will spend longer in retirement; at the same time the working population paying into the system is shrinking. In 2008, the over 60s made up 22% of the UK population and by 2033, it's projected that 29% of the population will be over 60(3). All of which means that it's getting harder for the government to fund the state pension and additional benefits as a result the age at which you can start claiming the state pension is going up. Current pension ages are 65 for men and 60 for women, but by 2020 both sexes will need to be 66 to be eligible to receive a State pension - so much for enjoying your twilight years.

To find out more, try the online State Pension Profiler at It shows you how much State pension you've built up so far, when you can claim it and how you might be affected by the proposed changes to the plan.

Smart planning

These statistics prove why it's now more important than ever to plan for your future, rather than relying solely on property, inheritance or the State.

The most effective way to ensure you're in control and can fund a comfortable retirement is to invest in a pension scheme, which has big tax advantages.

A company pension is a great way to do this, especially if your employer also contributes. You can control where your money is invested, the level of risk you take and how much you pay in, to ensure that your finances stay on track for retirement.

Taking out an Individual Savings Account (ISA) is also good way to boost your retirement savings.

Information and assumptions

All figures relate to the 2012-2013 tax year, unless otherwise stated.


(1) House prices: Nationwide UK monthly index, September 2012


(3) Ageing population: ONS - National population projections. 21 October 2009

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