Buy-to-let ahead of retirement freedoms

This article is part of
Retirement freedoms special report - April 2015

Buy-to-let ahead of retirement freedoms

With retirees getting access to their entire pensions pot from April, the big question is - where will they invest it? While investment funds are racing against each other in trying to come up with the best and safest product, many analysts say that one should not forget Britain’s love affair with the property market.

According to research carried out by the Bank of Ireland, 42 per cent of pensioners will take a lump sum to buy property – 13 per cent to pay off the balance on their mortgages and 29 per cent to purchase homes on the buy-to-let market.

The research also found that pensioners in London are the most property-hungry, with almost half – 47 per cent – saying they intend to purchase property with lump sums drawn from their pensions.

Article continues after advert

The research was carried out in November 2014, as part of a new buy-to-let index, launched by the Bank of Ireland which gives an indicator of the future health of the British buy-to-let market each quarter.

Buy-to-let is an attractive market but it is not for everybody, says mortgage adviser Daniel Bailey of Middleton Finance. “There have been many enquiries from those retiring soon and looking to invest in property using their pensions pot. But clients are also frustrated because they feel they might not have enough money in their pot,” he says.

With the pension freedoms, retirees will have more flexibility when deciding where to invest their money. While buy-to-let can be a smart investment, it’s also important for landlords to identify the areas with the best rental yields.

“There is a lot of interest in areas like the Midlands and the north of the UK, especially for 2-bed terraced houses,” says Mr Bailey, adding, “I haven’t seen much interest on the commercial side though.”

As property prices and rental prices continue to increase, buy-to-let can provide an easy and convenient way for retirees to earn a regular income, while also providing the opportunity for capital appreciation.

According to a research by Direct Line for Business, a Leeds-based business insurance firm, 43 per cent of retirees would consider a buy-to-let investment on the basis that it provides regular income. Landlords approaching the property market anticipate an average yield of between 10 to 14 per cent on their investment, the research highlighted.

Perceived security

The research also states around 23 per cent are attracted by the perceived security of the investment, 17 per cent by expected capital appreciation and 9 per cent because they would like to invest in something that will allow them to leave an inheritance for their children. But there are challenges that retirees can face as landlords when entering the buy-to-let market, and complete due diligence should be done before signing the deal.

“Taking the necessary precautions, such as carrying out full reference checks on prospective tenants, inspecting your rental property regularly, and taking out landlord insurance can help to minimise some of the risks faced by landlords,” says Jazz Gakhal, director at Direct Line for Business.

The other risk is no guaranteed rate of returns, explains Mr Bailey of Middleton Finance. “You will have to invest your own time if you let the property yourself. Key potential costs to take into account are maintenance and void periods, apart from set up costs, solicitor’s fees, and stamp duty,” he says.