Brits relying on property to fund retirement

A staggering 3.2 million people - 7% of UK adults - are relying on property investments to fund their retirement, leaving them dangerously exposed to fluctuations in the UK property market and interest rate movements, according to research from Baring Asset Management (Barings).

10% of 35-44 year olds are planning on retiring with the income they receive from property assets, compared with 8% of 45-54 year olds and 6% of 25-34 year olds.

A further 33% of UK adults - 15.1 million people - are not currently making any provision for their retirement, with young people in particular failing to think about their financial future - as one in three (34%) 25-34 year olds do not have any kind of pension plan in place.

Almost one in four (23%) 35-54 year olds is not making any provision for their retirement and a staggering 22% of over 55 year olds also do not have a pension in place for their imminent retirement. Barings’ research also reveals a huge gender divide in terms of pension provision, with 38% of women not having a pension, compared with 27% of men.

Barings’ CIO, Marino Valensise, is urging people to plan more carefully for their retirement: “Too many people are relying on property to fund their retirement. It’s crucial that we plan for our old age and that our investments are diversified amongst a number of different asset classes - not just property. The UK has seen an incredible increase in wealth in the last 20 years, fuelled, in part, by rising house prices in both nominal (gross of inflation) and real (net of inflation) terms; one factor has been the easier access to borrowing. It is highly unlikely that, during the next decades, we would experience similar levels of property price increases, especially in real terms. The events of the summer are already beginning to feed through to the average UK consumer in the form of higher borrowing costs based on more stringent lending criteria. This is likely to have an impact on the property market.

“Placing all your eggs in one basket in this manner really does leave you overly exposed to house price movements. Your pension should be invested in diversified assets that are in line with your age, lifestyle commitments and number of years to retirement.”

Marino recommends individuals take a core / satellite approach to the asset allocation of their pension portfolio. The core part of the portfolio should include assets such as global equities and inflation linked bonds. The satellite part of the portfolio should include asset classes which would contribute ‘enhanced’ investment returns from themes which are less correlated to the ‘traditional’ asset classes. Marino suggests the following formula as a guide to determine the weightings for each part.

Weights (%)

CORE (e.g inflation-linked bonds, Global Growth, UK Equity Income) 100 – years to retirement

SATELLITE (e.g. resources, Asian equity, emerging markets) Years to retirement

Marino Valensise concluded, ““It’s very worrying that so many people are not thinking enough about their financial future, and it’s not just young people who are failing to make any sort of pension provision. The longer you have before retirement, the more you should be placing in assets which will be able to generate a higher level of return. Our research shows that young people are putting off decisions surrounding their pension portfolios until they are older. Now that the onus is so clearly on the individual we have to start encouraging people to take a greater responsibility for their investments so that their pension fund will grow to a sufficient level by the time they come to rely on it.”