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Buy-to-let as a source of retirement income

This article is part of
Guide to Buy-to-let and Pension Freedoms

Investment in buy-to-let property can be a good, long-term investment but returns depend on many factors.

Dominic Field, chief executive of Temple Field Property, says buy-to-let can provide a stable and predictable high yield, and with increasing rental values, that income can increase over time.

He says utilising a mortgage can offer geared and higher returns than available in other asset classes.

In terms of the upside, Tony Müdd, divisional director tax and consultancy at St James’s Place, points out buy-to-let is an asset/investment class that is understood in nature by most individuals.

With buy-to-let, Mr Müdd points out you have an asset that will provide an income which will generally be predictable, reliable, inflation proofed and broadly unaffected by fluctuations in the value of the asset (property) itself.

In addition to income, he notes there is the possibility of additional capital gains. Depending on the level of involvement the investor wishes to have, management fees can also be kept to a minimum.

But on the downside, Mr Müdd points out the investor would need some experience of finding suitable property for buy-to-let or incur expenses in doing so. He says the same also applies for finding a tenant.

There are also likely to be periods where the property is without a tenant, and therefore not producing an income, Mr Müdd adds.

He says the investor would have to be prepared to get involved in sorting out any property issues, repairs, maintenance, additional incidental costs or, pay a management agency to do so.

Mr Müdd says the income from rental property will be subject to income tax and any capital gains, subject to capital gains tax in excess of any personal exemption.

When compared to a pension, he adds the full value of the property will be in the investor’s estate for the purposes of inheritance tax.

Bob Young, chief executive at Fleet Mortgages, says investing in buy-to-let will require a significant degree of homework on the part of the individual.

He says they need to make sure they are purchasing the right property, in the right area, plus targeting the right tenant sector and they have their eyes open to the costs and responsibilities that come with being a landlord.

As with any investment, Mr Young warns there is a risk involved here and, particularly for retired individuals, they need to be comfortable with that risk and be happy with their investment, especially if it does not go as expected.

He says: “It may well impact significantly on their ability to fund their retirement living.”