A person’s home may be their castle but it should not be their only retirement fund. At least that is the finding of a major new report entitled ‘Safe as Houses’, which was commissioned by equity release provider Prudential and written by Professor Merlin Stone of Bristol Business School.

However, the report claims too many people are risking their retirements by using their homes as their sole ‘pension funds’ - a high risk strategy that could easily backfire and leave many facing financial hardship and poverty in later life according to Professor Stone. He concludes that a balanced portfolio of savings, pensions and property is the only answer to saving for retirement.

The Prudential research reveals that 40% of people are planning to rely on bricks and mortar to provide them with an income in retirement. This is likely to fuel huge growth in the equity release market over the next 30 years, with people using these schemes to free-up some of the capital in their homes.

People aged 25-34 are the main band of people looking at their retirement income in a new light. Of this age group, 55% said that they would look to their investment in property to provide them with an income in retirement - compared to 47% of people aged 35-44 and 40% of those aged between 45 and 54.

The report claims that over the coming years there could be a significant fall in property prices in certain areas of the country. Maintenance costs are also set to rise dramatically as the ‘planned lifecycle’ associated with a number of post Second World War homes - many of which were built under loose planning and building regulations – begin to run out.

In some cases, this will lead to people facing maintenance bills of 10-20% of their annual income over several years. Many will have to take out equity release schemes to pay for this or to ensure that their properties are fit to be sold.

Professor Merlin Stone, Bristol Business School said: "With the recent bear market, many people have begun to question the value of investing in stocks and shares and have increasingly looked to invest in property believing that prices will continue to rise for the foreseeable future.

However, there is no guarantee to this and some market commentators predict that over the next few years, UK property prices could fall by around 20%, with the South East being the hardest hit.

"Even if property prices don’t fall, the ‘echo boomer’ generation – children of the ‘baby boomers’ – have a life expectancy of 20 or so years when they stop work. ‘Echo boomers’ need to ensure they have enough liquid income to live their retirement to the full, and if they suffer from degenerative illnesses in later life, to provide the dignity they would desire. This can be difficult if you are equity rich but cash poor and have the vast majority of your wealth tied up in bricks and mortar."

John Malone, National Mortgage Manager, Prudential said: "In these volatile times, it is important to have a balanced portfolio and not to overlook the benefits of investing in stocks and shares. Between 1975 and the first quarter of 2003, equities outperformed the growth in house prices by nearly 1% per annum. The returns would have been even higher if the investments had been in a pension fund for example, enjoying tax relief of 20% or more."

"With so many people relying on their properties to provide an income in retirement, what is certain - regardless of whether property prices rise or fall - is that there will be substantial growth in the equity release market. Last year, around £850 million was released through these schemes and over the next decade, this could rise to between £4 -£5 billion every 12 months."

"Retired homeowners have around £693 billion of equity in their homes but many do not have enough disposable income. Equity release schemes can be an ideal way for people to stay in their homes while simultaneously releasing some of the equity in their properties - dramatically increasing their levels of disposable income - through either a lump sum or regular payments, and improving the overall quality of their lives."

However, if you are planning to rely heavily on your property to provide an income in retirement, the report highlights a number of problems you could encounter. Some of these could be addressed by taking out an equity release scheme.

The potential perils of property as a pension fund:

• Maintenance costs could not only increase as a result of post World War II properties coming to the end of their planned lives, but also as a result of changing weather conditions.
• The higher the value of a property, the more likely its price will fluctuate. This is because it moves further away from the relatively safe market of the first time buyer and into markets where supply and demand is more likely to depend on short term regional economic factors.
• The returns on buy-to-let properties are declining. People investing in buy-to-lets are investing cash into property precisely when its value is peaking and when rents are already falling. The gross yield has recently fallen to around 6% after tax, roughly equal to the cost of borrowing.
• Betting on a housing shortage to keep property prices high is very dangerous. In areas of most acute shortage such as the South East, there is greatest pressure to relax planning constraints. This can have a dramatic effect on local property prices which can rise or fall quickly according to whether the properties are affected in a positive way, such as proximity to new amenities, or negatively, by things such as new traffic patterns.
• When you decide to capitalise on some of the equity in your property by selling up, it can be very difficult to exit the market at precisely the time you want and on your terms.
• The costs involved in purchasing, maintaining and selling a property can be huge. This can include fees for estate agents, lawyers and surveyors, the cost of refurbishment and maintenance, and taxes such as stamp duty and council tax, which in certain areas have increased dramatically in recent years. In contrast to this, the costs associated with an investment portfolio such as fund management fees are much smaller.