Should retirees cash in their pensions and invest in student property?
In April, retirees will have the freedom to spend their pension in one go if they choose to, thanks to new pension reforms being introduced by the Government.
However, some industry experts are warning retirees not to cash in their pensions and invest the money in buy-to-let property, as they may face higher tax bills than people who stay with pensions and ISAs.
The question is, is this a general rule of thumb? The answer is categorically no!
Soaring house prices over the last few years has meant that the popularity of residential property as an investment is growing fast. There are now over two million buy-to-let landlords in Britain.
Of the estimated 200,000 people who will cash in their pension from April next year when the new pension rules are introduced, about 32,000 (16%) are expected to use the money to fund a property purchase, according to Ipsos Mori research.
So will retirees may more tax if they invest in buy-to-let property? If a retiree cashes in a £300,000 pension pot to buy a property and lives off the rent for 20 years, he/she can expect to pay 43% more tax than someone who keeps the money in a pension and draws an income from it over the same time frame, according to calculations by Hargreaves Lansdown, the fund shop.
However, this comparison is based on the assumption that the property, ISA and pension investments all generated the same returns 3% a year real capital growth and 4pc annual yield.
If the buy-to-let property investments had significantly outperformed the funds held within the pension and ISAs, the total potential returns could still be much higher, making property a more lucrative investment, despite the tax disadvantage.
Projections by the Association of Residential Letting Agents (ARLA) suggest that every £1,000 invested at the end of last year using a 75% LTV mortgage would be worth £2,910 by the end of 2023. This would provide an average annual return of 11.3%. The corresponding annual return for an unmortgaged investor, they say, would be a more modest 6.3% (similar to the rate of return from gilts and equities over the 1996-2013 period).
Since the birth of the buy-to-let mortgage 18 years ago, student accommodation has outperformed all other traditional property assets and has been the strongest growing investment property market in the UK. It has also continued to be one of the most resilient investment sectors, with rental incomes and property values remaining stable, or increasing. The attraction of the student accommodation sector has been driven by structural undersupply and positive rental growth year on, despite the economic downturn.
The average gross cash rental yields for the student property sector in the North West of England were 13% for the first three quarters of 2014, well ahead of the 6.37%* forecast for average student property yields across the UK, for this year. (*Source: Savills Report: The UK's student housing sector, May 2014). What’s more, the yields are 6-7% higher on average than the buy-to-let market as a whole, which stood at 6.2%* between April and June 2014.
Investing in student accommodation offers retirees a long-term investment option, as the property is highly likely to be in constant demand throughout the calendar year. Typical rents are significantly higher for student properties, than a comparable Buy-to-Let property in the same city. A HMO (House in Multiple Occupation) property can provide an 8% minimum cash rental yield, though at Mistoria we provide a typical 13% total cash yield, including 5% capital appreciation.
Over the last 12 months, there has been a huge surge in student housing investment activity and student accommodation is certainly big business in the UK right now. This year alone saw £2.37 billion invested into the sector, surpassing last year’s total of £2.2 billion. Whilst the number of students is rising, so are the costs of rent for student accommodation, providing investors with much higher yields.
The domestic student population is continuing to expand, with an extra 30,000 university places offered in 2014. UCAS have reported they are expecting an all-time high of 500,000 applications this year.
*Mish Liyanage is Managing Director of the Mistoria Group
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