There is a common misconception that one's home can serve as an effective pension fund. In this video, financial journalist NORMA COHEN emphasises the importance of understanding the distinction between property as an asset for living, and property as a source of income in retirement.
TRANSCRIPT
Robin Powell: For many years, from the mid-1990s onwards, residential property was generally an excellent investment. All around the world, property prices rose. As a result, many people have decided their home will be their pension. But Norma Cohen, a former property correspondent for the Financial Times, says that’s a big mistake.
Norma Cohen: People who say things like “my house is my pension fund” are really placing themselves in a very, very precarious position. It may be that you can sell your house and buy something to live in which is smaller and less expensive, and be able to take some cash to live on. But a house is not an income.
RP: Remember as well that when the time comes to downsize and to free up capital to fund your retirement, you might not want to leave your family home. It’s a common problem.
NC: Part of the reason that there is this reluctance to downsize: yes, there is a comfort factor remaining in your own home, but it’s also hugely difficult – particularly for older adults – to pack up a lifetime of belongings, memories, mementos and so on, and to move.
RP: House prices rose during the pandemic but, since then, they’ve fallen – mainly in response to rising interest rates. That has made housing more affordable. But Norma Cohen still urges home buyers not to overstretch themselves.
NC: I had this argument with my son, who with his girlfriend wants to buy a property. He said to me, “I’m just wasting my money by renting.” No, you’re not. I said, you’re buying housing services. You’re buying accommodation services. That’s what rent is. A house is a functional asset: it serves a purpose, it allows you to live in it. To occupy it. It’s not the same thing as providing you with an income. It only becomes your pension fund if you can sell it, crystallise all the gains you’ve made in capital value over the years, and use those gains to live on in old age. In only the narrowest sense is your house your pension fund.
RP: Buying or renting is, of course, a very personal decision. But if you are thinking of buying your first home, or buying a bigger house, remember: you should see it primarily as somewhere to live, and not as a nest egg to fund your retirement.
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