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Fidelity personal finance specialist Marianna Hunt is back to advise a reader who is looking to turn their property portfolio into pension income.
Q: How do you convert an exclusively property portfolio into retirement income from age 55? I have no other form of pension bar the state pension.
A: First off, well done for recognising the issue. Many people assume “my property will be my pension”, only to find that generating a reliable retirement income from property alone is more complex than expected.
The key challenge is that you are trying to turn assets that are illiquid, lumpy and management-heavy into something that provides steady, flexible income. There isn’t a single right answer, but there are three broad routes to consider.
Three potential considerations
The first is to retain your properties and live off the rental income. This can work if the portfolio generates a consistent, sufficient yield after costs. However, rental income can be unpredictable due to void periods, maintenance and increasing regulation, and it leaves you exposed to a single asset class.
The second is to sell properties and reinvest the proceeds into pensions and ISAs, creating a more diversified, liquid portfolio that can be drawn on in retirement. This reduces the day-to-day burden of managing property and can make income planning easier.
In practice, many people opt for a third hybrid approach: gradually selling down part of the portfolio while retaining some property exposure.
If you do plan to sell, tax and timing become critical.
Savings vehicles
You are likely to face capital gains tax (CGT) on disposals. With the annual CGT allowance now relatively small, spreading sales across multiple tax years can help reduce the overall bill. Phasing sales also allows you to make use of several years’ worth of ISA and pension allowances, rather than investing everything in one go.
Pensions are particularly attractive because of the tax relief on contributions and the ability to take 25 per cent tax-free from age 55 (rising to 57 from April 2028). However, there are a couple of important constraints.
You can only receive tax relief on contributions up to your earned income each tax year – and rental income does not count towards this. The annual allowance (currently £60,000) also applies, although carry forward rules can help if you have unused allowances from previous years and are already part of a pension scheme.
Because of this, it’s a good idea to open a pension sooner rather than later, even if your contributions are initially small, so that carry forward is available when you begin selling properties.
You can only use carry forward if you have exhausted this year’s annual allowance first and have sufficient UK relevant earnings to cover this year’s £60,000 contributions plus the contributions being carried forward.
Alongside pensions, ISAs play a crucial role.
Unlike pensions, ISA funds can be accessed at any time and are tax-free. This is particularly important given the gap between when you want to retire (55), when you can access your pension (rising to age 57 from 2028), and when the state pension begins, which iscurrently around age 67.
ISAs can help bridge that gap and provide flexibility over how and when you draw income.
What do you want for your retirement?
Another key consideration is timing and sequencing. Property sales can take time, and prices vary by region and market conditions, so avoiding the need for a “fire sale” is important.
Phasing sales not only helps manage tax, but also allows you to gradually invest into markets, reducing the risk of committing a large sum at a bad time.
You should think about how much income you want in retirement, how often you want to draw that income, and how much risk you’re comfortable taking with it. Rental income may feel stable, but it isn’t guaranteed. Drawing from an investment portfolio comes with market risk, particularly in the early years of retirement, but having a few years’ worth of income in cash can help to manage this.
So, what kind of pension should you look to open? If you don’t currently have the option of paying into a workplace pension, a self-invested personal pension (SIPP) is likely to be the most flexible option. However, if you are employed and can access employer contributions, a workplace pension should usually be prioritised.
To sum up, the transition from property to retirement income is best approached gradually. Focus on diversifying your assets, managing tax efficiently, and building a mix of pensions and ISAs that can support both early retirement and later life.
Given the complexity and the sums involved, taking personalised financial advice would also be very worthwhile before making significant changes.
Please remember that this is not financial advice and everybody’s situation will be unique.
