Buy to let instead of a pension annuity for retirement income

Here’s a statement that’s hardly a surprise. The recent fall in property prices is not good news for those who are relying on property for their pension income in retirement.  Roughly 18% of all outstanding buy to let debt was taken out in 2007 when property prices peaked and some of these investors could now be in negative equity. They probably thought it was a good idea at the time and a better option looking ahead than a pension annuity.

Some who have been in the market for years will be fine as they will have large capital gains to cushion any downturn in prices - provided their portfolio is not over geared and they can afford rising mortgage interest payments.  Interestingly, though, one third of all landlords own just one buy to let property and if they bought recently, they could be seeing a loss on their investment. One really isn’t a good long term idea…too much reliance on one property.

For the overwhelming majority of the population, buy-to-let should not be seen as an alternative to making regular savings into a pension. 

Investors’ losses are on paper until they sell their assets and provided landlords have good tenants who pay the rent and it is sufficient to cover mortgage interest payments, the actual value of the property doesn’t matter in the short term. But the chief worry is that they may be forced to sell up because interest payments become unaffordable. 

The risks of using a buy-to-let investment as a way to save for retirement have always been there. Over the long term a buy-to-let investment should still return a healthy profit, and those who have injected a substantial amount of equity into the property should be positioned to ride out a downturn.

Mind you it’s fair to say that equity investors have suffered recently, as well as property investors. The FTSE 100 has fallen 19% from its June 2007 peak. Pension investors would therefore have lost 19% of the value of their UK equity portfolio if they had invested at the top of the market.

It is an interesting issue, and probably the best course of action, if possible, is to build up a large pension pot to be able to buy a healthy pension annuity income at retirement, but also have other means of income, such as buy to let, to top up the retirement income.

This entry was posted on Tuesday, August 26th, 2008 at 3:23 pm and is filed under General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.