Drawing pension cash under Chancellor George Osborne’s new rules and putting the money into property to provide an income in retirement might not be the best option for many would-be landlords.
Property pensions are unlikely to provide the same target returns as a traditional pension plan once the latest yields and property value statistics are crunched.
According to March figures from the Land Registry, the price of an average home in England and Wales is £170,000.
Research by Your Move and Reeds Rain letting agent chain LSL Property Services puts the gross annual yield of a buy to let at 5.2%.
That gives an annual rental return of £8,840 – or £736 a month.
But that’s without taking buying costs like legal fees and stamp duty into account. The figure is also hopeful for annual rent as voids and running costs like mortgage interest, repairs and insurance are not considered either.
According to the Association of British Insurers, the average pension pot is around £38,000.
Most funds try to give an annual return of 5% to investors – around the same as the annual gross net yield of a buy to let home.
Realistically, someone with an average pension fund could not afford to buy a £170,000 home to rent out.
Drawing all that cash from an average pension pot would leave a prospective property investor paying basic rate tax with £32,300 in their hand.
Assuming that cash goes into a deposit on a property with a 75% loan-to-value mortgage, that means the investor can only afford a buy to let home worth £129,200.
They would have to find the cash to pay for the buying costs and any refurbishment – and at that price the home is probably going to need it.
Importantly, with a 5.2% gross yield, the annual rental return would be £560 a month.
For most investors, these figures just do not add up to a sensible, safe investment.
Adding in other factors, the deal looks even worse – like the likelihood of rising mortgage interest rates in the near future and the illiquidity of bricks and mortar if the investor needs to raise cash.