Everyone’s getting excited about buy-to-let pensions, but how realistic are they actually? asks Sara Benwell
The big question on everyone’s mind, whether it’s trustees, scheme managers or investment consultants, is ‘what are members actually going to do at retirement?’.
The new pension freedoms, announced in last year’s budget, have blown the door wide open on what retirees can do with their hard-earned savings. Everything from pensions credit cards to holiday cruises has been mooted and what is becoming overwhelmingly clear is that no one really has the answers.
One suggestion dominating headlines is the idea that people might cash out and put their money in buy-to-let. Unsurprisingly this has won favour with British savers who have long felt the pull of bricks and mortar.
But how realistic are buy-to-let pensions? The answer, many may be surprised to hear, is not very.
Here’s five reasons why:
- Buy-to-let is about capital growth rather than income generation
The vast majority of buy-to-let mortgages in the UK are not great income generators. In general, when people invest in rental property, the money they make is reliant on an increase in the value of the house, rather than the rental income.
This is even more pronounced if the investor is getting a mortgage, rather than buying a property outright. Once the rental income has had to cover the mortgage payments, there’s not a great deal left over to provide an adequate retirement income.
- A massive tax bill
Whether a member is looking to release their cash to cover a deposit or to buy a house outright, the tax bill is likely to be huge. Unless the total amount taken as cash falls within the 25% lump sum (hugely unlikely with the average DC pot standing at £35k) the rest of the money will be charged at the marginal rate.And that marginal rate is likely to be pretty high if members are releasing enough money to put down a buy-to-let deposit.
- Fees, fees and more fees
The tax you’ll pay on your pension savings are only the beginning. There’s also stamp duty, lawyer fees and property surveyors to be paid before an investor can even get their hands on a property. Even then, any rental income will be subject to income tax.
- Putting all your eggs in one basket
If the pensions industry has learnt anything it is that diversification is crucial when it comes to long-term investments. Obviously putting all your money into buy-to-let property leaves little room for diversification, longevity hedging, protection from a fall in property prices, and the other myriad tools investors use to protect their assets.Hardly the ideal asset for a 25 year investment.
- OAP landlords
Even once a property is purchased, the hassle doesn’t end there. The owner has still got to organise repairs, repaint and refurbish, chase rents, and manage the process of finding new tenants when the old ones move out.Quite a lot of effort when you’re 90 and trying to enjoy a peaceful retirement.
Of course, it is possible to pay someone else to deal with all that, but that’s yet another cost chipping away at the meagre rents that are supposed to sustain a pensioner throughout retirement.
Realistically, buy-to-let property is one of the worst possible solutions for the majority of people approaching retirement.
Fortunately, however, those with defined contribution pensions are unlikely to have adequate savings to get on the rental property ladder, and those with defined benefit may find it difficult to transfer out - they’ll struggle to find a regulated adviser who’ll tell them it’s a good idea.