Planning for your retirement is extremely important. Traditionally, people relied on a company or state pension to see them through their twilight years. However, with many company pension schemes now running deficits, and with public finances under increasing pressure, these options no longer represent good value.
In recent times, the number of people taking out private pension schemes has been steadily falling. It’s likely that this is because the possible returns generated by a private pension are often thought to be too uncertain. The government has recently introduced an automatic enrolment scheme for workplace pensions; however, if you contribute to this at the minimum level, it is unlikely to provide a comfortable retirement.
Most people will use their pension pot to buy an annuity which provides an income for the rest of their life. However, because people are living longer and yields on gilts are at record lows, annuity schemes are offering poor value. For example, according to the Annuity Bureau, in 2003, a 65-year-old with a pension pot containing £50,000 could have bought an annuity with a guaranteed income of £3,575 per year for 5 years. However, by 2013, the same fund would only return £3,050 over the first 5 years– a drop of 14.7%.
Research shows that for those over 50, property investments are almost twice as popular than paying into a pension fund. It’s also true that many younger people are opting to enter the buy-to-let market rather than funnelling money into their pension funds.
Over the past 20 years or so, property prices across the UK have risen at an incredible rate. Figures from the Nationwide House Price Index show that in June 1992, the average price of a property in the UK was £52,905. In June 2017, the average price on the same index had reached £211,301, with properties in the South East.
Although there is almost continual talk of the housing market cooling down, this is unlikely to occur until the government takes steps to address the shortage of housing stock. A report from the House of Lords suggested that 330,000 new homes would have to be built every year to meet demand– but in 2016, there were just 147,960 new homes constructed.
In 2015/16, landlords in England and Wales received a return of 9.6% on their buy-to-let properties. Over the same period, the FTSE 100 index of shares fell by 3.9%. The poor performance of the financial markets in the wake of the crash of 2008, combined with record low-interest rates, means that investing in a buy-to-let property remains a very popular option. Not only could you benefit from any rise in the value of the house itself, but you could also use the rental income to pay down the existing mortgage. Investing in property in the UK could be the perfect way to prepare for your retirement.