As a result of reforms to private pension freedom, over 55's will now be able to cash in their entire pension. This dramatic news means, if done right, a buy-to-let investment could prove to be a far better long-term financial option than the traditional pension.
From 6th April 2015, people have been able to access their entire pension and use it however they wish. These changes apply to defined contribution pension schemes, where contributions are taken from both employer and employee and paid into a pot that can be used to provide an income upon retirement.
In years gone by – and through no say of your own – these contributions have typically been invested in stocks and shares, meaning your pension’s strength has always been reliant upon how well they perform. Now, the most recent Budget announcement puts you in control.
Chancellor Osborne says you may withdraw 25% of the whole pot tax-free, meaning you benefit from the tax relief on your contributions thus far. Essentially, those who have invested in their pension will have gained tax relief along the away and can now take advantage of this… and it’s predicted that many people will use their new-found freedom to purchase buy-to-let properties.
These changes come at a time when the housing market is booming and those ‘cash on the hip’ are looking into the possibility of becoming investors in the private rented sector.
Since the height of the financial crisis, the housing market has bounced back, tempting many people to snap up properties at cheaper prices in the hope that their values will rise. Those with enough money in their pension to use as a deposit – or perhaps even buy outright – will see this as a very good way of generating a higher income and potentially make further capital gains in the future.
Critics are concerned people may be tempted to flitter away their life savings and leave themselves with little or no money in their later years – particularly if the buy-to-let market crashes – but investing funds in the private rented sector is highly likely to provide a higher income than that of a pension in the long-term, so it’s a risk – if you can call it that – many are prepared to take.
Previously, people had to buy an annuity in order to receive an income for the rest of their life, but with men and women now living longer, the cost of buying an income for life has long been on the rise. As a result, a person’s annual income reduces – potentially to insufficient levels.
According to the Annuity Bureau, in October 2003 a 65-year-old man with a pension fund of £50,000 could have bought an annuity with a five-year guarantee of around £3,575 a year. A decade later, however, the same fund would buy an income that’s 14.7% lower; £3,050 a year. This leads many experts to believe the minimum contribution levels from a pension scheme will not provide a comfortable retirement in the future.
In contrast, during September 2014, LSL’s Buy-To-Let index found that properties in England and Wales reached monthly rents up to a high of £757. It also found the number of new tenancies increased by 9.2% from the previous year.
With all of this in mind, it’s no surprise that people are starting to see property as a more tangible asset than bonds and shares. With the value of property rapidly increasing – not just in terms of rental prices, but also overall value – a buy-to-let property will not only cover the mortgage costs, but it could also provide a valuable source of income. While property prices do fluctuate, the capital should grow in the long-term, which is especially true for properties in up-and-coming areas.
According to Rightmove, the average house price in England and Wales is set to increase by 30% in the next five years, so if you’re looking at using a buy-to-let property as a retirement investment, you could either live off the monthly income from the property or the bulk sum you receive when you eventually sell up.
As with any investment, there’s always going to be risk involved, and the benefit of using your pension money to buy a property will largely depend on an individual’s circumstances. A lot of people won’t have a pension big enough to buy a property outright – referred to as a “cash purchase” – but they should be able to use part of their pension to put down a good-sized deposit, then use a buy-to-let mortgage to finance the rest.
Many people are finding annuities aren’t high enough for the life they aspire to lead, so some experts are predicting people with lower value pension pots will be more inclined to take money out and invest it in the lower-end of the professional private rented sector. This may have a knock-on effect, however, as so many first-time investors buying into the same market will see property prices rise further, resulting in first-time owner-occupiers finding it difficult to get on the property ladder.
When considering investing in the private rented sector, it’s important to understand the potential pitfalls. Many people will assume their rental income is guaranteed for the full 12 months every year, for example, but void periods – where the property is empty between tenancies and bringing in no rent – should always be born in mind. With every void period comes liability for council tax payments, too, so it can be a costly time for landlords.
The average UK void period is three weeks, but with us it’s just three days!
Away from the income side of things, there’s also a lot of ‘red tape’ that comes with renting out a property. There are many, many legal things to bear in mind – too much for a lot of landlords to keep abreast of! It’s why many of our clients opt for our fully managed service, where we take care of finding tenants, drawing up tenancy agreements, handling maintenance and inspections, collecting rent and tenancy renewal, plus a lot more.
With all this in mind, it’s not hard to see the attraction of buy-to-let investment over a traditional pension. If done the right way, it can prove to be an invaluable investment for the future.