Investment strategies to build a retirement portfolio
The traditional way to invest for retirement income is in a pension plan. But, by saving for retirement this way, you’ll be severely limiting your retirement income potential.
People are discovering that there are better ways to create income in retirement. By investing in property, you could retire earlier, have greater flexibility, and receive more income in retirement. How to invest in property for stunning retirement income is exactly what you’ll learn in this article.
Why traditional pensions are dying
Just about the only real benefit of investing in a traditional pension is that you get tax relief on your payments. If you pay income tax at the basic rate, you’ll get 20% tax relief on your payments. Effectively, for every £5 paid into your pension, you only pay £4.
However, the amount you can invest is limited, and the total you can have in your pension pot at retirement is limited, too:
- You can only invest a maximum of your annual salary or £40,000, whichever is the greater
- If you have no earnings, you can invest a maximum of £3,600
- Over your lifetime, you can only build up a pension pot of a maximum of £1.5 million
Once you’ve invested in a pension, the money is locked away. You can’t access it until you retire. Most schemes allow you to take an income when you’re 65, though some will let you access your funds as early as 55 years of age. If you take your pension pot early, you could pay extra tax on it. It could be that the private pension age is raised to as high as 70 by the time you want to retire.
And when you do want to create retirement income, the most common way of doing so is to buy an annuity. When you do this, you’ll probably receive around 5.4% in annuity income. And your investment will be gone. When you buy an annuity, you relinquish your investment. It becomes the property of the life company that sold you the annuity.
Suddenly, traditional pension investment doesn’t seem all it’s cracked up to be, does it?
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Invest for your retirement using other people’s money
When you invest in property and use a buy-to-let mortgage to do so, you’re using other people’s money to make money. It is called ‘leveraging’, and it’s how to invest in property and release its real potential.
Let’s say you start with an investment amount of £50,000 and buy an investment property worth £200,000. You invest using an interest only buy-to-let mortgage of £150,000. If the investment property rises in value to £250,000, you can remortgage to release the £50,000 equity.
If you’ve built up savings from your rental income, you may be able to add, say, another £10,000 or £20,000 to this. Now you have a deposit to buy a second property.
As property prices rise, you simply rinse and repeat. In this way, you use the equity in your property portfolio to grow your portfolio – each time benefiting from other people’s money to do so.
What happens when you want to retire?
When you want to retire, there are several options open to you. For example:
· Live on your property portfolio income
You could simply live on the income from your property portfolio. As a simple calculation, let’s say that your 20-property investment portfolio is valued at £6.5 million, with a total mortgage of £5 million.
If the gross rental yield is 5%, and your mortgage rate is 4%, your net rental income will be:
Rental income – mortgage payments
£325,000 – £200,000 = £125,000
After allowing for professional investment property management and other costs, you will probably be left with an income of around £75,000.
You’ll also have a real legacy to leave to your loved ones.
· Sell a property to release equity as income
Using the above example, you hold a property portfolio of 20 properties. The property market has been rising. Each property is mortgaged with a loan of, say, £250,000. Each is now worth an average of £325,000.
By selling a single property, you’ll raise £75,000 after paying off the mortgage. That’s a sizeable amount of money which can now be used as retirement income. Plus, you’ve got the rental income from the rest of your property portfolio.
There might, of course, be some capital gains tax to pay. If the property market continues to rise, your investment property portfolio will continue to increase in value.
· Use rental income to invest in hotel rooms to create more income
You could, of course, use your rental income to invest for income.
Hotel room investment could be a great investment for this. You’ll get:
- A fixed income during the lifetime of the investment (usually 5 years)
- Fixed capital growth over the period of investment
With fixed income that is typically around 8% or 9% and guaranteed capital growth of 15% to 20%, hotel room investment is a hands-off, high yielding investment. And one that pays a better rate than annuitie and you don’t give away your investment pot, either.
Read our article “What you need to know about hotel room investments” for more information.
How will you fund your retirement?
I don’t know many people who will have saved their lifetime pension allowance of £1.5 million by the time they retire. I know of even fewer who are happy to give away their lifetime savings to a life company. That’s what you do when you buy an annuity.
In 2015, annuity provider Partnership found that the average pension pot in the UK is £87,724. Use that to buy an annuity, and the income will be around £4,700.
Meanwhile, a recent Council of Mortgage Lenders survey found that:
- The average landlord owns 2.7 investment properties
- Half of the UK’s landlords are mortgage free
- Half of those with buy-to-let mortgages have a loan to value ratio of less than 60%
- The average mean annual gross rental income of UK landlords is £17,500
As you can see, investing in property could be a real alternative to traditional pension investment:
- It provides flexibility to produce income in a variety of ways
- You retain access to your investment
- The income you receive is probably going to be higher
- And, as property values increase, so too will your wealth. Rising rents will help to protect you against inflation
And all of this, by investing with other people’s money!
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