Why off-plan property is the antidote to eroding pension income

Brett Alegre-Wood
January 4, 2018

How you could use other people’s money to fuel the retirement you desire

If you’re worried about your pension income when you retire, you’re right to be. It’s not simply the erosion of income from pension funds that people are concerned about. It’s whether they will have enough money to pay for the escalating costs of living.

However, a recent analysis from Scottish Widows offers an insight into why off-plan property could prove to be the best investment for those hoping to retire on decent income in 10 to 20 years. While they don’t intend it to, we believe that Scottish Widows’ analysis reinforces why you should invest in property, not a pension.

In this article, you’ll discover why savvy investors are turning their backs on traditional pension investments and ploughing into off-plan property instead.

You need more to retire today than ever before, but pension fund value has crashed

I know, I know. It seems like a dumb statement to make. Prices have increased in the last 20 years. Of course, you need more to retire. But I’m not talking about the income you need. I’m talking about the fund you need to produce that income.

Even looking back as recently as ten years ago – just before the Global Financial Crisis –  annuity funds paid out around 8% on average. A pension fund of £200,000 would buy a retiree an income of around £16,000 for life, guaranteed.

Retire today, and that same fund will buy only around £8,000 income per year – half of what it did ten years ago. Factor in inflation and the spending power of a £200,000 pension fund is around a third of what it was in 2007.

Meanwhile, rents are rising – fast

While the value of pension funds has fallen, the income that buy-to-let landlords are receiving has increased fast. The average rent in the UK is now more than £900 per month. And this brings me to the analysis by Scottish Widows. It believes that pensioners who are renting in 10 to 20 years will have to find enormous amounts of money just to pay their rent.

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In other words, Scottish Widows’ analysis concludes that rents are going to continue to rise fast. They believe that to afford rent in retirement in 20 years, you should save £6,000 per year between now and then.

Why save £6,000 in a pension when you can use other people’s money to invest?

This analysis got me thinking. £6,000 per year is £500 per month. That’s a lot of money. Is there a way that you could use your cash savings to boost your lifestyle in retirement, and avoid the pensions timebomb that Scottish Widows are warning its customers about? Perhaps, not have to save £500 per month, every month, just to be able to afford to rent a home in 20 years?

What if you invested in off-plan property? Let’s examine the maths first. We’ll make a couple of assumptions to help us:

  • First, that the property will yield 6% in gross rental income.
  • That you pay 12% of rent in property management fees.
  • That maintenance and other costs equal 5% of rental income.
  • That your mortgage interest rate is 4.5%.

We’ll only consider the first year after you complete on the property:

  • If you have £50,000 to pay as a deposit and borrow £120,000 at 4.5%, you will pay £5,400 in interest in the first year.
  • Your rental income will be £10,200.
  • Your investment property management fees will be £1,224.
  • Your maintenance costs will be £510.
  • Your net income will be £3,066.

And here’s the thing – you haven’t even spent a penny of your £6,000 pension savings budget!

Fast-forward 20 years

Since the end of World War II, residential property prices in the UK have doubled every 8 to 10 years on average. Now, let’s be a real conservative, and say that over the next 20 years, property prices will rise at half this rate: around 4% per year on average.

Let’s also assume that the rental yield remains at 6% throughout this period. Look how the numbers roll up:

retirement income article.png

So, here’s the thing:

Using your £50,000 savings as a deposit, you have used other people’s money to leverage your investment:

  • You have made £144,101 in rental profit.
  • You have a property worth almost £360,000.
  • You haven’t had to save a single penny of that £6,000 per year that Scottish Widows suggest is needed.

Now you have real choices. Choices that you probably wouldn’t have otherwise:

  • You could pay off the mortgage with your rental profit, and have money left over for an around-the-world cruise.
  • It would leave you with a property producing around £17,800 net rental income per year – and this income will increase every year, helping to protect you from inflation throughout your retirement.
  • You could sell your property and have a fund of more than £382,000 (before tax) to use for your retirement (£358,164 – £120,000 + £144,101).

Think what you would do with this flexibility when you retire.

Why wait 20 years to retire?

Here’s something else that investing in off-plan property could provide you: an earlier retirement. All that profit that your property investment has been making – what if you used that as a deposit on another property, instead of simply saving it? Then add the £6,000 per year that Scottish Widows says is needed by people saving for retirement.

That’s a big war chest you’re saving. Instead of leaving it in the bank, why not use it to secure two, three, or even more properties? And as the value of your property portfolio rises, you could release equity to fuel further off-plan purchases.

As your property portfolio grows, so does your income. By using the equity from existing properties in your portfolio, you could remortgage to power successful retirement in a decade. You could create real wealth and inflation-proofed retirement income by using other people’s money, as your tenants pay your mortgages for you.

Why invest in off-plan property for retirement planning?

Investing in off-plan property gives you the opportunity to maximise your returns from investment. When you buy property off-plan, you:

  • Lock in a discount to current market value
  • Have a choice of the best properties before a development is complete
  • Benefit from staged payments and your choice of finishes
  • Can buy property where people want to live: in areas benefitting from regeneration and near to the best shops, schools, transport links, major employers and major investment

How do you want to fund your retirement?

Do you want to save £6,000 per year of your hard-earned money to give you a modest retirement in 20 years from now? Or would you rather benefit from a property investment strategy that uses other people’s money to fuel the investment that could provide the retirement lifestyle you desire, sooner?

To discover more about the very best off-plan property investment opportunities in the UK today, contact one of the team on +44 (0)207 923 6100. We’ll be pleased to help you create the best property investment strategy to bring your retirement dreams closer.

Live with passion

Brett Alegre-Wood


Building a Property Portfolio, Maintenance cost, Off Plan Property, Pension, Retirement, Retirement Investing, UK Property

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