Ralph James

Buy-to-let or pensions: which has the profit, freedom, and security that’s right for you?

“Being a landlord might still pay better than a pension”

– that was the arresting headline in The Telegraph that caught our attention recently.

Pensions have certainly been squeezed, with workplace pension pots shrinking and inflation eating into returns. Meanwhile, buy-to-let is regularly portrayed in the press as no longer viable, despite research from Hamptons revealing that the average rental yield of 6% is 50% higher than the 4% of pensions.

So who and what do you listen to if you want to start planning for your future?

There’s no replacement for hearing things straight from the horse’s mouth, so we’ve gathered some thoughts from our landlords on why they choose buy-to-let. We’ve also included some useful facts that don’t always make the headlines so you can see what feels right for you.

This week’s blog doesn’t constitute financial advice, and you should speak to an expert before choosing a pension or investment. But if you’re on the fence about becoming a landlord or whether to expand or offload your lettings portfolio, we hope you find some clarity to start 2023.

More tenants are chasing fewer homes.

It’s no secret that rents are soaring, with rises of 20% and more in some areas last year accompanied by record-high demand. For several reasons, the rental market is unlikely to cool down any time soon because:

  • many landlords who focused on short-term yields have sold up, creating a huge shortage of rental property and massive competition among tenants
  • economic uncertainty and interest rate rises have convinced more buyers to keep renting for longer, fuelling further demand
  • nowhere near enough new housing is being built or planned, and the chances of anything changing significantly in the foreseeable future look pretty slim.

In short, the rental market needs more homes, and the door is wide open for private landlords to fill the gap. And when you provide high-quality accommodation, you can be sure of constant demand while generating the highest possible rent from the best tenants.

Your money needs to grow after you retire.

We’ve all seen how higher inflation can reduce the value of your savings. If you want to maintain a rewarding and comfortable lifestyle in later life, your money needs to keep working to stay ahead of the cost of living.

Some very basic things to remember about income in retirement include:

  • When your pension reaches its maturity date, it’s decision time again. You could leave it alone if you don’t need it, take a cash lump sum (the first 25% is tax-free), or convert it to other investments like shares or annuities.
  • If you feel the stock market is too risky at that stage of life, you could buy an annuity for a guaranteed annual income if rates are good at the time, although you may get back less than you pay in, depending on how long you live.
  • Rental properties carry on working for you as long as you own them, and you can keep expanding your portfolio during your retirement by refinancing to release tax-free equity and fund the purchase of more properties.

Many landlords view a private pension and buy-to-let as the perfect combination. They see their pension as the pot with its sturdy foundation, and their rental properties as the plant with no limits on how high or how long it can grow.

Does being a landlord buy you more freedom?

Long-term planning is essential for future financial freedom, but should that mean waiting until you retire to live the life you want? The debate rages over instant gratification versus long-term planning, but there’s no reason why you can’t have both with a mixed investment strategy.

  • Once you start a pension, your funds are locked away until you are at least 55, and the Government has confirmed plans to raise that age to 57 in 2028. 
  • Pensions start paying out after they mature, while buy-to-let gives you rent from the day your tenant moves in and can free up other income to boost your private pension.
  • You control the direction of your lettings portfolio, while your pension or annuity provider makes all the decisions about managing your funds.

For landlords, part of the attraction of buy-to-let is the direct control it gives them, while also providing a balance between planning for retirement and enjoying life now.

Is buy-to-let still profitable?

You can hardly move for stories gleefully announcing the collapse of buy-to-let as something that no longer works, so why are so many landlords still successful?

The answer is pretty simple, so let’s take a look beyond the headlines to understand the bigger picture.

Press stories rarely mention that buy-to-let income keeps increasing over time – rents have risen by an average of 30% since 2008, turning a 6% yield on a property bought then, into 8% now.

Being smart with how you buy and hold rental properties can significantly increase your tax allowances and profit.

Buying unmodernised homes and upgrading them to contemporary standards is a proven rinse-and-repeat formula that creates more equity faster to expand your portfolio.

Given all of the above, it’s perfectly possible to build a sustainable buy-to-let business of one or more homes that becomes more profitable over time. Still not convinced? Then take a look at our previous blog on the Buy, Revamp, Rent, Repeat formula.

What security does buy-to-let offer?

Security is a massive consideration for retirement, and the standout feature of buy-to-let for many landlords is that property is a tangible asset that can’t simply disappear overnight, or ever.

Some of the factors that make rental property a secure investment include:

  • Regardless of economic ups and downs, having a home is everyone’s first priority,
  • While pensions are managed by highly-experienced fund managers, they’re also invested in stocks and shares that follow the often sudden turns of the stock market.
  • Even in periods when property prices stagnate or fall, rents typically rise as buyers become tenants, which increases competition and pushes up yields.

Whatever the sentiment and realities of the economy, rental homes are always in demand, which is probably why the phrase as safe as houses” exists.

Could buy-to-let be right for your future?

With the turmoil of the last year or so, having all your eggs in one basket probably isn’t the answer when planning for your retirement. 

There are so many options out there, and speaking to an expert is a great first step. So if you’d like to talk about making buy-to-let part of your strategy, call us on 01306 284 555 or email us at info@ralphjames.co.uk for a chat about the rental market in Surrey and to see if it’s right for you.

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