What Should Investors Consider Before Investing Pensions into Buy-to-let?

By Simon Morris On Friday, October 30 th, 2015 · no Comments · In , ,

A recent survey showed that most UK landlords aren’t planning to use pensions to invest in buy-to-let property. Simon Morris explains that investors must consider all their options before pursuing this strategy.

Landlord plans

Research from the Association of British Insurers indicates that £1.3 billion has been paid to customers as lump sums in the first three months since pension reforms went into effect. Evidence shows that buy-to-let landlords have earned returns of almost 1,400% since 1996. With profit margins like these, many experts suggested that investors may utilise pension reforms to invest in buy-to-let property.

However, a study conducted the National Landlords Association suggests that existing buy-to-let landlords aren’t planning to pursue this option. Only 5% admitted that they’re planning to use pension reforms to increase their property portfolio. Yet 61% are going to use the income it generates to support themselves when they retire.

This indicates that property is generally seen as a safe way to generate retirement income. This theory was backed by an Office for National Statistics survey of 20,000 people. 42% – up from 32% in 2010, said that they see property as the key to cultivating the largest pension fund possible.

Consider hidden costs 

So why aren’t existing landlords planning to use pension reforms to invest in buy-to-let? Simon Morris explained: “It’s not surprising that existing buy-to-let landlords aren’t planning to expand their portfolios. Yes, buy-to-let has registered great returns since 1996, but these investors know that there are a number of costs attached to pursuing this investment option, especially through utilising pension reforms to do so.

“There are a number of hidden costs attached to buy-to-let, including council tax, refurbishment costs and letting agent fees. A platinum Property Partners study conducted earlier this year shows that landlords pay £8,359 in costs on average, per buy-to-let property, every year. This is without factoring in extenuating factors such as void tenancies, which 60% of landlords experience every year.

“Investors need to weigh the returns of buy-to-let up against these hidden costs. Only when investors factor these costs into the equation will they determine how much retirement revenue they can expect to generate by investing pensions into buy-to-let property.”

Seek investment advice 

He elaborated: “That isn’t to say investing in property can’t provide investors with a stable retirement income stream. They just need to conduct research and find the best option for their circumstances. I’d strongly suggest investors seek advice from Financial Conduct Authority regulated Independent Financial Advisors (IFAs.) They’ll consider an investors expectations of returns against their willingness to take on risk to point them in the direction of the most suitable investment products.

“An IFA may suggest, for example, that property bonds, investment funds, and other products can serve as more effective alternatives to bricks and mortar stock. These options, which can be invested in ISA wrappers, can provide investors with certain tax benefits. A number of these products even guarantee initial investment.”

Explore alternative options 

The investment expert concluded by saying: “Ultimately I’d advise investors to stop, think and explore alternative property investment options, with the guidance of an experienced IFA, before they use their pensions to invest in buy-to-let. There’s a reason why existing landlords are hesitant to pursue this strategy, and that’s because in some cases, it’s not the best way to generate a stable income stream for retirement.”

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