Pensions vs Buy-to-Let Properties
Many workers across the country are now being enrolled into a new pension scheme set up by the government. The scheme will see every contribution paid in by the employee topped up by their employer and the government. The scheme hasn't seen every worker enrolled yet, but the government hopes to continue adding to the scheme every year.
The news will come as a relief to many workers who either don’t have a pension or are required to set a private one up themselves. In theory, it should give people financial security for their retirement. However, as the buy-to-let property market continues to grow, does it make more financial sense to buy a property and live off the rent or sale difference?
Pensions explained
On paper, the government’s pension scheme looks like a very attractive policy - and so it should. The scheme essentially doubles a person’s money and is completely tax free. When it begins, workers will pay in just under £10 for every £1,000 of eligible earnings, with their employers doubling the contribution. Tax relief from the Government is the final piece of this relatively simple jigsaw.
Once the scheme is established and has been running for some time, these figures are forecasted to quadruple, providing a tidy sum upon eventual retirement. And, what’s more, if the pension scheme fund continues to rise, you could be looking at a fair increase on the amount you've paid in.
However, pension rules dictate that you can't just withdraw the whole amount and spend it as you choose. You can take a quarter of it as a tax-free lump sum, but the rest has to be used to generate an income for life. Most people will choose to take out an annuity, providing them with a fixed income, but it doesn't always generate as much as people think.
With today's rates, if a 65-year-old took their 25% lump sum from their pension pot of £208,000, their annuity would pay out around £9,000 per year. When you consider somebody working 40 hours a week on minimum wage would earn £13,125 per year, you're looking at a huge difference in the amount you have to live off.
How buy-to-let could be the alternative pension
This is where buy-to-let may be the saving grace. Should property prices continue to rise, buying a house and letting it out at market value will mean you end up with a larger nest egg when you retire. Even if the rent only just about covers the mortgage and other associated costs (general upkeep and potential management fees), as long as property prices continue to rise over the next 30-50 years, you're onto a winner when you eventually sell it on.
As an example, if you bought a £120,000 flat using £30,000 worth of savings and its value went up by 4% a year, your pension pot would be £397,000 when you sold the property in 30 year's time. Compare that to your £30,000 savings sat there earning 4% a year, you'd have only amassed £99,000 in the same period of time.
Of course, not everything is set in stone. For example, today's rates may not be tomorrow's rates, so there is plenty to bear in mind before making the investment. The proceeds from any sale will be taxed, whereas pension funds aren't. And, before all that, there are the entry costs for an investor to consider. Whilst some lenders will accept a 20% deposit, a lot want 40% deposits, which can immediately squeeze some people out.
Nevertheless, should everything hold out, a buy-to-let will certainly deliver a much higher retirement fund than the pension scheme. As the saying goes, there is no reward without risk.
Get your buy-to-let property with CPS Homes
If you feel that buying a property to let makes financial sense, we're here to help. Our investment side of the business has been expanding, meaning we can offer services beyond that of a standard agent. We regularly find properties for clients in a position to buy, organise architects and plans, forecast rental income and supervise main building contractors. This is all in addition to the usual services of finding tenants and signing tenancy agreements, as well as looking after the rent, maintenance and day-to-day running of the property. Take a look at some of our properties for sale or contact us today to find out more.
The information contained within this article was correct at the date of publishing and is not guaranteed to remain correct in the present day.
