Property investment vs annuities which is best for retirement income?

Property investment for retirement – how else will you fund your lifestyle after work?

As retirement approaches, you may be considering property investment as a source of income. You’re about to lose your monthly salary cheque. You’ve still got bills to pay, grandchildren to buy Christmas and birthday presents for, and then there’s you “bucket list” – things you want to do before it's too late. Right now, standing on the Great Wall of China seems a long way away.

Here you’ll discover the disadvantages of investing in annuities to create retirement income. We’ll also look at three types of residential property investment that retirees make and see how they might work out as income generators.

The problem with annuities as income generators at retirement

The traditional method of creating income in retirement is to buy an annuity. However, there are a couple of problems with annuities:

  • Once your money has been invested, it’s gone. You may be able to buy an annuity that pays your spouse an income after you die, but you won’t be able to leave your life’s savings to your children and grandchildren.
  • For a higher income today, annuities often have income payments fixed for life. If you live another 20 years, you’ll still be receiving the same monthly income then as you do now.
  • If you want your income to rise every year, you’ll need to take a lower income today.

I’ve got £200,000 to invest − what retirement income can I buy an annuity?

You’ll have a few choices to make when you buy an annuity. These are:

  • Single or joint annuity (a joint is a type to buy to give your spouse a pension if you die).
  • The guarantee period (how long your annuity payments are guaranteed for).
  • Level or increasing payments (level payments will remain the same throughout your retirement; increasing payments help to protect against inflation – though you’ll have to guess what inflation will be).
  • Your health (if you’re a heavy smoker with heart disease, you’ll receive a higher income than if you’re 100% healthy).

I plugged in some numbers to the annuity pension income calculator at the Money Advice Service. I chose to retire this year, aged 65 (that’s a pretend figure, by the way!), with a 50% pension for my wife if I die. I’m in good health, so I didn’t bother about a guarantee period. I decided to link my income to inflation.

That £200,000 I had saved would earn me £435 per month. That’s £435!

Let’s say you’re about to retire, and you have £200,000 to invest for your retirement. How far would £435 per month get you? And don’t forget, once you’ve bought an annuity, your money is gone. For good.

(Why don’t you try the annuity pension income calculator now, and discover what income you could receive?)

What about a residential property investment?

I have to confess, and there’s a reason I chose £200,000 as the figure that you have to invest in retirement, and if you were retiring today. It’s because, according to the Nationwide House Price Index, the average house price is £205,715. In other words, once you’ve negotiated a discount, £200,000 will buy you average in the UK.

So, what rental income can you expect to receive from your investment property? Rental yields vary widely across the UK, from around 8% in Inner London to around 4% in Brighton. According to LendInvest, the average gross rental yield is 5%. In other words, if you invest in an average property in the UK at an average price, and receive the average rent, your gross income will be around £833 per month.

£833 per month. That’s nearing double your gross income from an annuity. Plus you have other benefits, including:

  • When you die, your spouse receives 100% of the income for life.
  • The property is always there. It can be bequeathed to your loved ones.
  • If property prices go up, you’ll benefit from increased wealth.
  • You can raise your rent by inflation or more.

Your investment advisor will recommend that you invest in an annuity to create retirement income. What do you think is the best investment? If your investment doesn’t create the income you want, how will your lifestyle in retirement be affected?

(Why not read this investment guide '14 investment facts your financial advisor won’t tell you' before you sit down with him to discuss your retirement plans?)

(Read our article on her investment blog which uncovers the truth about investment property and retirement and discover what financial advisors are scared you’ll find out.)

Contact Gladfish on +44 (0)207 923 6100 now to discuss the income-producing property opportunities that we currently have available.

Live with passion

Brett Alegre-Wood

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