17th June 2013
Many people have buy-to-let properties which they see as their ‘pension’ – either from the income they get each month or the capital which is hopefully growing – or both. “But are bricks and mortar really a better bet for retirement income than an annuity? We think not,” says payingtoomuch.com founder Michael Ward.
“Supposing the rental income from a £250,000 buy-to-let property is £900 per month, or £10,800 per year with a deduction of £100 per month, or £1,200 per year for running costs, this would give a net income of £9,600 (before personal taxes).
“The yield on the buy to let property investment would be 3.84% which in theory is index linked as over the longer term rental incomes should rise in line with inflation. However if the property had cost half that at £125,000 then the yield would be double at 7.68% and all the time the capital value would be maintained, taking into account the residential housing market fluctuations and that it could take up to six months to return the capital.
Wards says that this may look pretty compelling but says that consumers need to remember that when they buy an annuity they are buying a guarantee that come what may means they will receive a monthly payment.
“This guarantee may make the annuity rate look a little lower than say a residential property investment. But the annuity payment will not stop unlike rental income if there is a period when the property is vacant and there are no unexpected bills to pay for repairs”, he says.
“There will be no troublesome tenants who cause disturbance or damage. And the annuity continues for life, which means in full force during any period of illness or incapacity and with any investment there is the ‘sleep easy’ test. Aome annuity holders may spend time in a residential care home and in these circumstances would not want the bother of managing individual investments. They would prefer the peace of mind of knowing that the annuity just pays the income come what may.”