Property and pensions – will your rental income be enough in retirement?

Rents have risen to record highs. They’ve increased by 10% over the past year to an average of £1,278 a month outside London.

Add to that the increasing demand for rental properties and it paints a rosy picture for the landlords who own the estimated 4.6 million rented homes in the UK.

However, on the other side of the coin, the total amount of interest being paid on mortgages each year by buy-to-let investors has increased by 40% over the past 12 months. And the rise succeeds a decade of tax and regulatory changes that have squeezed landlords.

While pensions are the most popular choice when it comes to funding retirement, over half of people see property playing a part in funding later life.

If you’re a landlord looking to fund your retirement through rental income, here’s what you need to consider.

While this might be most relevant to landlords, or those considering becoming landlords, it’s not personal advice. The retirement choices you make are important, so check that you understand your options.

The government’s Pension Wise service can help if you’re over 50 and need guidance.

How much is enough?

The Pensions and Lifetime Saving Association (PLSA) has three retirement income standards. These figures can be a good starting point for how much you might currently need each year:

• Minimum – £12,800 a year would cover your basics, with a small amount left for fun and social occasions.
• Moderate – £23,300 a year would afford you a little more flexibility in your spending, like being able to run a car and go on a holiday abroad every year.
• Comfortable – £37,300 a year would mean you have more financial freedom with more holidays, home improvements, and more lavish spending.

These figures are for a single person living outside London.

So, will my rental income cover this?

With the full new State Pension currently at £10,600 on a yearly basis, any shortfall would need to be made up from other sources of income.

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At first glance the current average rent prices look sufficient. But this ignores the cost, unreliability, and tax landlords face.

Cost

Even after you’ve found someone to live in your property – perhaps through a letting agent, who you’ll have paid to find and vet potential tenants – you’ll need to consider ongoing costs.

They could include redecoration and repairs, gas and electrical appliance maintenance, buildings and contents insurance, legal insurance and the costs of complying with the various landlord regulations.

These costs can quickly mount up. For the 2020/21 tax year, landlords paid an average of over £2,500 on repairs and maintenance on their property, or properties, alone. This is one of several costs which have to be paid, even if the property becomes vacant.

Market fluctuation

Rental prices might be on the rise now, but if they falter in future, you could be forced to match market prices to retain current tenants or attract new ones. Any gaps in your tenancy will mean a hit to your monthly income – this is difficult to predict ahead of time.

If you eventually decide to sell your property, it’s worth remembering the property market is relatively illiquid – a property can sit on the market for months before you find a buyer. You won’t be able to access the money you invested quickly and there are costs that come with selling.

Tax

And we can’t forget tax. You pay income tax on rental income based on your current tax banding and potentially capital gains tax when you come to sell. You’d need to factor this into your anticipated retirement costs.

What are the other options?

There are alternatives to consider – one is investing. The longer you invest, the more time your money has to grow, so it’s best to get an early start.

If you’d started investing in the UK stock market in September 2003, over the next 20 years your investment would’ve almost quadrupled in value by the same month this year, rising by 288%.

The average value of a property has increased by 118% over the same period.

The increase in property value doesn’t factor in rental income. It also doesn’t include the cost of both time and money that comes with owning and maintaining a property.

These are historical figures and not a guide to future returns. Remember, just like property, investments and any income from them can fall as well as rise in value, so you could get back less than you invest.

Investing in a pension

The HL Self-Invested Personal Pension (SIPP) gives you a wide variety of investment options and lets you control how much money you pay in and when.

Find out more about the HL SIPP>

You can choose from ready-made investment portfolios or pick your own individual investments. These could include funds, shares, investment trusts and more.

With a SIPP, there are low-cost investment options, and you have all the same tax advantages as a traditional pension, as well as a government boost of up to 45% in tax relief. If you’re a Scottish taxpayer, tax rates and bands differ, and so different rates of tax relief apply.

There’s also the option of opening a Stocks and Shares ISA. You can invest up to £20,000 each tax year and any income and growth is free from UK tax.

Pension and ISA tax rules can change over time. The benefits of putting money into a pension or Stocks and Shares ISA, whether alongside investing in a property, or by selling your rental property, will depend on your personal circumstances.

Remember, you can't usually access money in a pension until you're 55 (rising to 57 in 2028). This article is not personal advice. If you’re not sure if an investment or course of action is right for you, ask for financial advice.

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