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Beware of shifting unlocked pension cash to buy to let
16 April 2014
Easing pension rules to give retirement savers more control of their cash has triggered a lot of talk about switching cash from pensions to buy–to-let, but the numbers just don’t seem to add up.
Landlords who are making real money out of buy to let fall into two categories – those who invested before the credit crunch and others who let shared houses in multiple occupation to increase rental income.
The problem for a buy to let investor drawing down pension cash is the average pension pot is not larger enough to support a decent buy to let investment.
Crunching the numbers
The figures are like this:
• The average cost of a home in England and Wales is £170,000 (Land Registry March 2014)
• The average gross buy to let yield is 5.2% (LSL Property Services Buy to Let Index)
• The average pension fund totals £38,000 (Association of British Insurers)
Now crunch those numbers:
• A £38,000 pension pot drawn down after tax leaves a basic rate taxpayer with £32,300
• £32,300 as a 25% deposit on a buy to let translates into a home valued at £129,200
• A 5.2% yield gives an annual rental return of £559 rent a month. That does not include times when the property is standing empty, mortgage interest, insurance, repairs, letting agent costs or tax.
• The running costs to set against rent a year are likely to add up to at least £528 a month:
Mortgage interest - £343 on a 4.25% loan
Repairs - £55 as 10% of gross rents
Insurance - £30 a month (estimate)
Letting agent fees - £100 a month at 15% gross rent plus VAT
Even annuities give a better return
That gives a landlord a net profit of around £28 a month, or £336 a year, which is worse than the average 3% or £969 a year paid by a standard annuity the buy to let landlord is hoping to better.
Running a property as an HMO will give a better yield, but will also increase costs to take into account licensing and higher management costs.
Buy to let looks a poor option for pension investors looking to find a better return on their cash – even the ‘granny bonds’ issued by National Savings from January 2015 at around 4% interest gross seem more interesting than buy to let.