If you ask most people how they’re planning for retirement, the answer usually has three parts. Pensions (state, workplace, or private), often several for anyone who has worked abroad, then savings and investments built up along the way.
Property rarely comes up, even though for many of the people we work with it’s one of the largest things they own. The house is where you live, or where you plan to live one day again, while pensions and investments are what you retire on.
What does the “fourth pillar” mean?
Earlier this year, Emad Aladhal, the FCA’s director of retail banking, told the Later Life Lending Summit that later life lending could become a “fourth pillar” of retirement. Research by Fairer Finance, cited in the speech, suggests that by 2040 around half of households aged 60 and over could benefit from drawing on their housing wealth. Between them, they’re expected to hold roughly £4.3 trillion in property.
The FCA’s focus is mainly on products such as equity release, which suit some people and not others. A more useful point was Aladhal’s observation that the industry works in silos, with mortgages, pensions, investments, and later-life planning each handled separately. In our experience, that’s the most common problem with property in retirement planning: it gets planned in isolation.
Why property in retirement planning matters more if you live abroad
For British professionals in Hong Kong, property often means more than one house. They may have a UK home, rented out since the move, alongside a flat in Hong Kong. Some plan to move back into the UK house when they return, and others expect to sell.
A UK property owned from overseas raises a few points that are easy to lose track of from a distance:
- Rental income is taxed in the UK. Income from a UK property remains taxable while you’re living overseas.
- Selling can bring a capital gains tax bill. Non-residents have been liable to UK capital gains tax on UK residential property since 2015.
- Relief depends on how you used the home. The relief available when you sell a former home depends on how long you lived in it and how you’ve used it since, so the timing of a sale matters.
- Access can be slow. A house can be worth a great deal and still take months to turn into money. If you expect property to fund part of your retirement, the speed of access deserves as much thought as the value.
People often deal with each issue separately, with different people, often in different countries. Each part can be in reasonable order on its own, but nobody looks at how they fit together.
How does inheritance tax link your home and your pension?
Planning each part separately is becoming more costly because inheritance tax changes make it much harder to leave property out of retirement planning.
When you leave a home to children or grandchildren, the estate can usually claim the residence nil-rate band. This is an extra ÂŁ175,000 inheritance tax allowance per person, on top of the standard ÂŁ325,000. Both can pass to a surviving spouse or civil partner, so a married couple can leave up to ÂŁ1 million to their direct descendants free of inheritance tax. The allowances are frozen until April 2031.
A few things are worth knowing about how the allowance works, particularly for people living abroad:
- It only applies to direct descendants. Children, step-children and grandchildren qualify. Leaving the home to a brother or niece doesn’t qualify.
- It tapers on larger estates. The residence nil-rate band allowance reduces by ÂŁ1 for every ÂŁ2 an estate is worth above ÂŁ2 million.
- Pensions will count towards that ÂŁ2 million. From April 2027, most unused pension funds will be included in the estate for the first time. This can reduce or remove the residence allowance, even if the pension passes to a spouse.
- A let property can still qualify. The home doesn’t need to be where you live now, as long as you lived in it at some point.
- Lifetime gifts have limits. Giving the house to your children while you keep living there without paying market rent usually won’t help with inheritance tax.
Taken together, this means a decision about your pension can now change your house’s tax position, and vice versa.
What should you think about before returning to the UK?
For most of the people we advise, property in retirement planning comes down to making each decision about the house with the pensions and the family’s plans in view, so that the home supports the retirement they want.
If you’re planning to return to the UK, it helps to think this through before the move. Start with where you’ll live and whether your existing property still suits the retirement you want. Consider whether selling before or after you return changes your capital gains tax bill, and what you would live on in the first few years if your plan depends on a sale. Then consider how the property sits alongside your pensions, both for the income you’ll need and the estate you’ll leave, and make sure your will reflects who you want to inherit it.
It’s easier to work through all of this with one adviser who can see the whole picture in both the UK and Hong Kong. If you’d like to talk through how your property fits into your wider plans, we’d be happy to help.
đź“© Email us anytime: info@charltonhousewm.com
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