Property as a Pension?
Many property investors have bought into property over the last few years as a way of providing for or supplementing their pension. This is understandable given the turbulence over recent years in the Stock Market to which many pensions are linked and also the demise of the final salary pension where companies were responsible for providing their employees with an income in their retirement.
Given the latest rise in interest rates, is a property based pension still such a good idea? There are a number of aspects of property which do make it ideal for pension investing. These are that:
1. It is relatively low risk.
Unlike direct investment in shares, property as an asset class is relatively stable and has only fallen in value in real times twice since the war. This means that as a pension investment it is much better suited than many investments as it means that should you need to sell on retirement then is value should stay constant and avoid the large fluctuations that are often associated with equity investments.
2. A property is ideal for a pension in that it provides the option of taking a large capital sum or providing a regular income in retirement.
This gives the individual retiree the flexibility to spend or invest their capital sum following the sale of their property or alternatively take regular income in the form of rent to provide or supplement their income.
3. Flexibility is a key advantage.Traditional pension products are incredibly rigid in the way they work. This is because they have to comply with certain criteria set out by government in order that the pensioner is properly provided for. In return for this the Government gives tax breaks to those people that invest in pensions as a way of encouraging them to make provisions in their old age. This means that currently anybody can invest in their pension such as a private or stakeholder pension and the Government will refund the income tax they would have paid into their pension. Very generous you might think. All this comes at a price; namely that you loose control of when you retire or what you can do with the proceeds of your ‘pension pot’. This is a huge sacrifice by future retirees which potentially traps them into a working life that complies with the Governments set retirement age, currently 65 for men and likely to get higher as life expectancy grows. The advantage with a property investment is that if at the age of 50 you have a midlife crisis and want to ‘up sticks’ and move to Brazil you can. Just sell your investment property a go.
4. Property is an ideal asset to pass on to your kids.
For those people with children and family as the years draw by increasingly thoughts turn to matters of estate planning and passing on your wealth to the next generation. It can either be used as a home for them to live in or can be retained as an investment. The disadvantages with an asset such a property is it that it will be subject to capital gains tax if sold or and inheritance tax should the value of your estate breach the limit, currently £275,000. However, whilst this is not ideal it is often preferable to having to put most of your pension into an annuity. This is a product which guarantees to give the purchaser a regular fixed income until they die. The problem is that this may give you only a relatively small income when annuity rates are low as they are now. In recent years they have dropped from nearly 9 to 5%. A typical retiree will get about £7000 pa for every £100,000 invested. For those with families it also means that unlike a property you are investing a significant proportion into a wasting asset or one that on your death will be worth nothing.
What about the figures?
Using Property Hawk’s unique Investor Appraiser you can calculate what your future financial returns will be. For example using the example of buying a £200,000 property with a 75% repayment mortgage on a 5% yield your returns at the end of 25 year mortgage would be 16.8% per annum assuming that the long term growth rate of 5% in house prices continues (inflation at 2%, rental growth of 3%). In basic terms you would have a property that was paid for and worth £338,640 which assuming a rental of yield of 5% would rent for £16,932 per annum. In my book that doesn’t seem a bad deal for putting in just over £50,000 now. The other thing is I quite like the idea of ‘swaning off’ to Brazil when I’m 50. I’m not sure I want to wait until I’m 65+ before I can get my hands on my hard earned saving just because the Government say so.