Becoming a ‘grandlord’: Top 5 benefits of investing a pension in property

Wed 27 May 2015

Old people looking at their pension details

Now that retirees can access their pension funds as cash, many are looking at buy-to-let as a way to get the most from their pension savings. Good returns, a long history of strong performance and tangibility make property an attractive investment, particularly compared with the volatility of the stock market and low interest rates on savings.

Jane Wilkinson, lettings director at property specialist Leaders, says: “Demand for rented accommodation has been strong for many years, and is still increasing, with more people renting than ever before. In many areas there is not enough property to satisfy demand, rents are rising, tenancies are getting longer and good quality properties do not stay empty for long. All this paints a very stable picture for landlords and is appealing to older investors who can now use their pension savings to become ‘grandlords’.

“Like any investment, buy-to-let comes with no guarantees, but, done with proper care and planning, the benefits are compelling.”

For those considering buying to let, Ms Wilkinson highlights the top 5 benefits of investing a pension in property:

1) Good returns in income and growth

Buy-to-let can deliver great returns over the medium to long-term, giving investors the opportunity to earn a regular monthly income whilst also achieving capital growth. Longer-term house price growth is around six per cent per year, according to most reliable measures, and in most good buy-to-let areas, rental yields of five per cent or more are achievable.

With the performance of traditional pension funds often strongly linked to that of stock markets, by investing your pension in property, you can avoid volatile equity markets and benefit from a more stable source of income and growth.

2) Benefits not offered by annuities

Annuity rates are at historic lows - around four per cent – making this traditional option for retirees increasingly unattractive. Furthermore, if you buy an annuity you give up any further growth from your pension whereas investing in property gives you both a rental income and the opportunity to grow your capital.

Unlike an annuity, an investment in property is not limited to an individual’s lifetime and can be passed on to the next generation, and generations to come.

3) Save on fees to maximise your pension pot

Many pension funds charge significant fees for managing your investments, even when they perform badly, which further reduces the value of your pension pot. If you used an independent financial advisor to set up your pension you may also have to pay commission to them on an ongoing basis.

Investing your pension in property gives you control of it, enabling you to potentially make more of your pension pot and at the same time avoid those eroding pension management fees.

4) Borrow to boost your investment potential

Investing in property means you could take out a mortgage – to be paid off by your rental income - while you enjoy the potential capital growth. Most buy-to-let mortgages are done on an interest-only basis, so the amount borrowed will not be paid off over time. This is tax efficient, as you can offset mortgage interest payments against your income tax bill.

If you secure the right buy-to-let property and mortgage deal, your rental return could still be substantially higher than your mortgage payments, giving you the option to save the extra cash to supplement your life, invest in another buy-to-let or use it to pay off the mortgage at the end of its term.

During the time that you own the property you will benefit from the capital growth across the full value of the property, often giving you a higher capital return than on a cash only purchase.

Whilst mortgages for older owner-occupiers can be harder to obtain, many buy-to-let lenders are prepared to lend to older landlords, in some cases up to the age of 80 or 85.

5) Take control over your investment and limit the risks

No investment is risk-free, but with buy-to-let there are a number of practical steps you can take to limit the risks. Consulting a letting expert to guide you on where and what to buy for maximum return is the best first step for a solid investment. A good letting agent will also find you a reliable tenant, ensure you stay on the right side of the law, take care of your property and protect your interests at all times.

You also have the option to take out specialist landlord insurance to cover you in case of rent arrears, damage to you property or legal fees. This comes at a cost but can save you money if anything goes wrong and gives invaluable peace of mind so you can enjoy your retirement to the full.

Your local Leaders branch will be pleased to offer free, impartial advice on investing in a buy-to-let property, tailored to your budget and investment goals.