Is your home your pension?

The research, commissioned by The Observer, revealed that a third of those people will live on income generated by investment properties, while a little more than half said that they would sell their own home to fund their retirement.

"For those who lack confidence in pensions, property often seems like a good alternative," says Patrick Connolly, IFA at Chase De Vere. "People are either able to sell their main property and downsize when they get to retirement or buy additional properties and rent them out."

With the majority of homeowners having a robust faith in the UK housing market and a belief that, over the long term, prices will remain on an upward trajectory this can seem like a sensible option.

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Property prices rising

"The advantages of property are that people can see that they own a real tangible asset, rather than a number on a statement from a pension provider, and if renting out they can benefit from a consistent and regular income," adds Connolly.

According to research from HSBC, landlords in cities including Manchester, Blackpool, Southampton and Nottingham enjoyed rental yields north of 7% in 2015, while those in Luton,Oxford, Cambridge, Slough and Cardiff were getting upwards of 6%.

Capital values are rising too. At the end of 2015 Halifax reported that the average UK house was worth £204,552 - up an impressive 9% on the previous year.

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However despite these compelling numbers, Connolly says relying on property to keep you warm in retirement could be a risky strategy. "It should be remembered that property prices can fall as well as rise and this will be a real danger when interest rates start to rise and mortgage payments become that bit more expensive."

For landlords there is also the risk that you'll have periods where your property is without tenants, meaning you'll have to find the money to pay the mortgage. You also need to be prepared for the costs and hassle associated with managing a rental property which could become increasingly inconvenient as you get older.

Taxing issues

Don't forget the tax implications either. Income tax could be liable on your rental income (as it would on pension income) but you could also be stung with a big capital gains tax bill whenever you come to sell. Then there is inheritance tax to consider – as much as you may want to leave your property to family members it is one of the least tax efficient assets to pass on.

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Downsizing dangers

Downsizing may not be plain sailing either. When you consider all the costs associated with buying and selling (from estate agency fees to conveyancing costs) and the dreaded stamp duty, downsizers may not be able to unlock as much capital as they need – even in a rising market, which is no guarantee.

Connolly says: "If property prices have gone up it means you'll get more for yours when you sell, but it also means you'll have to pay more for whichever property you buy next. Also many people find that when they downsize they can't afford to buy a property they like in an area they like."

So while you imagine you'll be able to manage with a smaller property when your kids have fled the nest, the reality could be different if grandchildren come along. You may also find that even if you can get by with fewer bedrooms, getting used to smaller kitchens, cramped living spaces and no off-road parking could feel like a real downshift in your lifestyle at the very time you want to start enjoying it.

Diversify, diversify, diversify

From an investment risk point of view property can be problematic, adds Connolly. Unlike pensions (which allow you to invest across a broad range of asset classes, and thereby spread your risk), relying on property often means putting all your eggs in one basket.

"It is difficult to get any real diversification when investing in property as most people can only afford to buy a small number of houses, so you are unable to spread risk. Property is also quite an illiquid asset, meaning you may not be able to sell any properties at a time and price that you want," explains Connolly.

He adds: "For most people the best approach for long-term savings is a combination of pensions and Isas. Pensions provide initial tax relief which give your savings an immediate uplift but they are inflexible, whereas Isas can still be tax-efficient and you are able to access your money whenever you like."

That's not to say an investment in property cannot form a part of your retirement strategy, says Marino Valensise, chief investment officer at Barings Asset Management. "Young and old need to fully appreciate the level of risk involved in expecting to fund your retirement through the use of a volatile asset such as your home, or from other properties such as buy to let. Investing for your retirement is about long-term planning and as people are living longer, more emphasis needs to be put on how a lengthier retirement will be funded. It is imperative that people diversify their investments through a range of assets, which can, of course, include property."

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