Property is king for a retirement plan according to most real estate brokers. But that’s them telling you to buy their products.
The root problem is, owning property can be very expensive even for pensioners.
By 2017 will be new lending rules that many speculate would make it difficult to get large buy-to-let mortgages.
The Telegraph published a post whether or not pensions retirement based on buy-to-let investments is feasible.
Using historic investment and housing data AJ Bell modelled how much £100,000 would grow (in capital and returns) over 10 and 20 years in three scenarios.
It compares investing in a pension (assuming a basic rate taxpayer) with someone buying a single buy-to-let property without a mortgage, and with someone buying three properties and borrowing to do so.
In the third scenario, the original £100,000 is split into three where each third becomes a 25pc deposit on a property.
Total borrowing is thus £300,000.
Stamp duty, tax and other costs are factored in with the property investments.
Over the first 10 years the £100,000 pension grows to £203,612 after charges – assuming stock markets perform in line with the past decade, delivering 5pc per year, total return. No income is being taken at this point.
At the same stage, the single buy-to-let property has increased in value to £123,095 (assuming again the past decade’s returns of 27pc are repeated) and yielded £41,180 in rental income, a total return of £164,275. Meanwhile the value of the equity in the three buy-to-let properties has grown to £171,600 and attracted rental income after mortgage costs and tax of £72,420 – giving a total of £244,020.
Pensions clearly beats a portfolio of just one property, but investors willing to take more risk – both in taking out mortgage and managing multiple properties – are well rewarded.
Fast-forward another decade – 20 years from the first investment – and the picture is much the same.
Even when income is taken at a rate of 4pc a year from the pension pot, it still beats the total returns on a single buy-to-let. The three property portfolio does produce £42,000 more than the pension over the 10 years but again, this comes at far greater risk.
Tom Selby, a senior analyst at AJ Bell, said: “Unless you are prepared to take on multiple buy-to-let properties and borrow significant amounts of money to do so, a pension is going to be the easiest and most profitable way to save for your retirement.
“You can start saving in a pension from as little as £1 per month via a direct debit. For property you need to have a deposit, probably of around £20,000 to £30,000, but most people can’t afford a deposit on their own home let alone a second property for investment purposes.
“Really the debate should not be around whether property is an alternative to a pension but whether property would make a good addition to someone’s overall retirement income strategy once a base pension has been established.”