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Retiring through Property in the UK: Pension vs Property

Property vs Pension hero

Retirement is often a catalyst for property investment in more ways than one. While many people turn to bricks and mortar as a nest egg for their golden years, there is also a growing number of retirees who are developing Buy-to-Let portfolios in later life.

Property is an incredibly flexible investment asset that can easily be adapted, making it a relatively common choice for those that want to build long-term gains. That said, is property a good investment for retirement?

What is the average retirement income in the UK? 

According to Government statistics, the average UK pensioner earns around £304 per week after taxes, housing costs and contributions, vastly different to 1994 when the average pensioner earned £161 per week. 

Last year, benefit income was the largest component of total gross income for both pensioner couples and single pensioners – 59% for individuals and 35% for couples.

Couple Retirement Number

(Source: PLSA)

Income from occupational pensions made up 29% of total gross income for pensioner couples and 25% for single pensioners.

According to Sanlam, a wealth management company, the average income people feel they need in retirement to achieve their goals is £34,000 a year. Over a standard 15-year retirement, this would amount to £510,000 in pension savings.

Single Retirement Number

(Source: PLSA)

In reality, using the average UK retirement income mentioned above, the average pensioner is relying on £14,592 a year – £218,880 in total pension savings over a 15-year retirement period.

How much do you need to retire in the UK? 

It’s expected that just 12% of under-55’s have set a target for their pension pots – meaning nearly 18 million people in the UK are not prepared for retirement.

According to new guidelines by the Pensions Lifetime Savings Association (PLSA), based on research by Loughborough University, there are average target thresholds for establishing a certain standard of living. The PLSA believe these thresholds are:

Minimum: Individual needs an annual income of £10,200. A couple needs £15,700.

Moderate: Individual needs an annual income of £20,200. A couple needs £30,000. 

Comfortable: Individual needs an annual income of £33,000. A couple needs £47,500.

The PLSA believe that a combination of the full state pension, which roughly translates to £8,767 per year, and auto-enrolment into a workplace pension would typically mean the minimum level is achievable for most people.

Nigel Peaple, director of policy and trade at the trade association, says that: “Nearly three-quarters (76%) of people believe that retirement living standards would help them to know if they were on track for the lifestyle”

In terms of actually funding retirement, Salisbury House Wealth laid out a retirement plan that covered a 42-year career with a retirement age of 67 and life expectancy of 82. It revealed some shocking statistics. 

As of February 2020 – to earn a retirement income of £19,000 would require saving around £7,348 every year over a 42-year career starting at 24 and ending at 67.

42 Year Retirement Plan

This would mean that 30-year-olds starting now should ideally have £51,000 saved already. Those who are 24 – with just one year in the workplace according to average figures – should already have their first £7,348. 

And by the time we hit 65, having ideally saved that £7,348 every single year over a 42-year career, we should have more than £308,000 to fund that £19,000 income over a 15-year retirement. With an assumption of 2.5% inflation, this savings pot would actually need to be worth £323,000. 

As you’d expect, this is a relatively ambitious goal for the average UK worker, a key reason that an average of 14% of UK adults are already planning to work beyond age 65 – rising to one in five (21%) of under 35s.

How to invest for retirement in the UK?

According to our own research, the number one reason for making an investment is ‘investing in the future’. 

With pensions decreasing in value due to rising living costs and other expenses, many people are turning to investment to supplement their income in later life. Property is often viewed as a quality retirement asset because it suits long-term growth and is a relatively stable investment.

When identifying the ideal property, investors should always consider quality over cost. Property should be considered a ‘long-game’; buy quality and value – over cost – up front and let it grow naturally. The UK is a renter’s market and the importance of having quality only ever increases exponentially, especially as tenants begin to prioritise modern facilities and exclusive amenities that you wouldn’t find in the market a decade ago.

Confidence in Retiring Graph

Similarly, while a quality product will ensure higher rental incomes and capital appreciation, the strength of yields is just as likely to be driven by location. A development that can stand the test of time in a varied market will provide secure yields. The key steps should be taken when identifying the ideal location – look for nearby amenities, employment and jobs, good schools, future regeneration and infrastructure improvements such as transport links.

The success of investing for retirement can also be heavily impacted by timing. While it’s never too late to make an investment, the earlier the better. Having an investment over the long-term means maximising returns and the potential to take advantage of compounding – reinvesting any returns.

Is property a good investment for retirement?

Property is typically considered one of the best investments for achieving long-term goals such as a comfortable retirement. According to data from the Office for National Statistics, 29% of people believe that property is the safest way to save for retirement, second only to saving into a company pension.

Property is seen as straightforward, tangible and stable – it’s a part of everyday life and unlike other more complicated forms of investment, it requires relatively less technical knowledge.

Research by the Tax Incentivised Savings Association (TISA) found that people aged 50 or over were typically facing an income shortfall of £11,400 a year and for many, the answer is simply to work longer. But what if you’re looking to make more out of retirement?

For many, property is a better alternative. TISA data also suggests that 68% of people believe property should form some part of retirement planning. Expanding on this research, Canada Life has found that 63% of their survey respondents have a property worth more than their pension. 

Consider this: over-55’s have nearly £365 billion in property equity. The value of their personal pensions? £75 billion.

The true value of property investing for retirement is also highlighted by the multiple income streams it can provide. The potential for regular monthly income, combined with the possibility of capital gains, as well as retained ownership of the asset can be massively appealing for an investor.

This is why property is so useful as a supplement to a wider portfolio rather than a single investment on its own. Diversifying a portfolio can be the best way to build long-term wealth and also works towards lowering risk – making both property and pensions viable for a long-term, comfortable retirement fund. 

Can I use my pension to buy property?

Withdrawing from a pension to pay for a Buy-to-Let property is an idea on the rise with data showing that nearly £2.4 billion has been cashed out by savers.

A poll by YouGov discovered that 30% of respondents aged between 45 and 54 said they were considering accessing retirement funds to purchase a Buy-to-Let property.

Since pension freedoms were introduced in 2015 – people have been able to access their cash from a defined contribution (DC) pension from the age of 55 without the need to buy an annuity. The first 25% of the savings pot can be taken tax-free. This has opened up the potential for more people to make their own decisions with their retirement savings.

While there are plenty of arguments for and against using pension funds to purchase property, the most important thing to do first is consulting a professional, particularly around lump sum taxation that could occur as a consequence of withdrawing.

Investing in a strong market can mean finding immediate returns, especially if the asset is ‘ready-made’ – fully-furnished and tenanted. The demand for quality rental accommodation is incredibly high, as more people are priced out of home ownership. In turn, rents are rising which is good news for Buy-to-Let investors.

It’s also difficult to ignore the growth of the private rented sector. Expected to make up 25% of the wider housing market by the end of 2021, renters are also expected to outnumber homeowners by 2039. This only raises the appeal of property as an asset, especially as price growth continues to rise in key areas. 

As with any investment, using a pension to buy a property depends on the investors aversion to risk. While it can deliver quality returns through rental income and natural market growth, it’s arguably a better choice to invest earlier, allowing the property to maximise returns in preparation for retirement. 

Can I get a Buy-to-Let Mortgage when I’m retired?

While residential homeowners are generally advised to complete their mortgage payments, if possible, before they finish work, Buy-to-Let (BTL) mortgages tend to work differently. This is because unlike residential mortgages, a BTL property will usually fund repayments through rental income rather than a work income or pension.

Typically age plays less of a factor in applying for a Buy-to-Let mortgage, although upper age limits can still limit success. Some lenders, for example, will not allow a mortgage to run past 70. A 60-year old, however, could still take out a 10-year mortgage and clear the debt by selling the property.

The key is to look for flexible lenders and consider your professional network. It’s vital to find trusted partners that understand both the market and your position, so that you can find the best product for you. 

Want to know more about property mortgages for retirement? Speak to our advisors. 

Is rental income taxable in retirement?

Tax is a vital aspect of property investing to consider, especially during retirement. If you’re using your pension to fund a property for example, remember that you’ll typically pay tax on any withdrawal over the 25% tax-free threshold: 20% on anything up to £31,785 and 40% on anything up to £150,000. This can be a large chunk of a pension fund and is a vital consideration for any retirement investor.

In terms of rental income, you will still have to pay Income Tax after you’ve retired. It’s mandatory for all pension income, including the State Pension, providing you’ve gone over the tax-free allowance.

Remember that if you do have multiple income streams during retirement, it’s important to ensure each ‘pot’ is being taxed correctly – you don’t want to be paying more than you have to.

If you’re looking to take the step into investment and identifying new ways of supplementing your pension or simply your income, property can be a great start. As part of your due diligence, the best place to start is by finding your ideal location and development. Finding an emerging market can be a fantastic way of identifying long-term investment opportunities, such as Slough in the South-East.

With predicted property price growth of 14.8% over the next four years and currently in the midst of a wide-scale regeneration project, Slough is forecasting as an incredible investment location. New Eton House sits at the heart of this redevelopment – a beautiful residential development within walking distance of Slough’s thriving commercial sector. Discover this stunning development and see how New Eton House could be a part of your investment portfolio today. 

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