By now, most over-55s will have heard the enormous news from the 2014 Budget announcement earlier this month – that purchasing an annuity at retirement is no longer compulsory.
In fairness, this has been the case (on paper, at least) since 2011 – but with the punitive tax treatment of pension drawdown, annuities are still virtually the only choice until the government’s sweeping tax reforms come into force.
From April 2015, anyone over the age of 55 who invested into a defined contributions pension will be able to withdraw their full pension at the marginal tax rate, rather than the 55% rate previously imposed. Many are speculating just where pensioners might start to invest under the new, liberalised regime, and one consensus is proving particularly common – buy-to-let property.
Buy-to-let property has proved very popular in recent years due to decent yields, solid capital returns and the fact that – unlike annuities – property remains part of your estate after you die, meaning that you can pass the asset on to your family.
If you are thinking of investing your pension in buy-to-let property, below are some points you may wish to consider.
- Your ‘investment horizon’
Simply put, your investment horizon is the amount of time you have for your investment to show a return. The closer you are to retirement age, the shorter this period is likely to be.
The average retiree can currently expect to continue to live for around 18 years (if male) or 22 years (if female) following retirement. In the last two decades, house prices have more than doubled – but many experts agree the market is approaching a ‘critical mass’ in terms of affordability, and there is no guarantee that they will rise as sharply in the next two decades.
Also consider that many buy-to-let mortgage lenders impose maximum age restrictions on their borrowers – generally 70–80 years, though some will go up to 90 years.
- Your attitude to risk
The success of a buy-to-let investment hinges upon having a paying tenant. Between arrears, voids (periods where the property is empty, i.e. for repairs), damage and running costs, buy-to-let can become quite risky unless you do your research and get it right.
- The funds you have available
If your pension pot is particularly large – in the hundreds of thousands – then you can purchase a property outright. You need not worry about mortgage criteria or interest payments, and can begin to enjoy the spoils of your investment immediately.
However, the average pension pot is only around £17,700 1 – enough for a small deposit on a cheap property, but far from enough to buy outright.
To make a good return from property, you need a competitive interest rate and healthy equity – the very best buy-to-let deals can be found at around 60% LTV (loan to value).
- Care costs
This last point applies to all alternative pension investments, not just buy-to-let, but is nonetheless pertinent; as observed recently in The Observer, cashing in your pension may have implications for future care costs.
As of 2016, money invested in a pension scheme will not be counted as part of an individual’s assets when calculating how much they have to contribute towards the cost of their social care should they become ill or infirm. However, money held in other assets – including property – will be counted.
As such, retirees who withdraw their money to invest in property risk exposing themselves to high care costs in the future.
Tips for investing in buy-to-let property
If you’ve read this far, then you’ve probably weighed up the risks and decided that you’re still interested in investing your money into rental property. Below are some tips that may help you:
- Unless you want to spend your retirement changing lightbulbs, chances are you’ll want to be an ‘armchair investor’. Though it will increase your overheads (typically by 10–15% of your rental income), you will want to find a good letting agent. This also widens your net – employing someone else to manage your property means that you can invest anywhere in the country, allowing you to chase the best prices and highest yields. Bringing me on to…
- …location! You need the right property in the right place at the right price – two out of three won’t do. Research the local area thoroughly, including local demographics, amenities and the prices charged for comparable rental properties. Also look into whether or not any local residential developments are in the pipeline – a glut of new homes will ease demand and suppress local rents, meaning you won’t be able to charge quite as much.
- Get the right mortgage. If you’re not investing with cash, having the right mortgage is key. This is particularly true if you are close to or past retirement age, as you will need to find a niche lender who will cater to your needs. To ensure you get the best deal possible and maximise the return on your investment, strongly consider using the services of a dedicated buy-to-let mortgage broker.
Finally, and above all else, good luck – and enjoy your retirement!