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Last Updated: Thursday, 27 July 2006, 22:49 GMT 23:49 UK
Citizen reporter: Property as a pension
Arno de Wever
Arno de Wever investigates property or pension
Arno de Wever, 31, from London, is concerned that he has not put anything like enough money aside for his retirement.

He investigates how much he needs to enjoy a comfortable old age - and whether property investment can help him achieve his ambitions.

Every week, it seems, there is a newspaper article warning that people are not saving enough for their retirement.

So the big question is, how much do I need to retire?

According to Francis Klonowski, a certified financial planner, you need an annual income of 20,000 in today's money.

"You can live comfortably off this, if you don't have high ambitions like travelling the world or keeping the same lifestyle as when you are working. Any luxuries you want to permit yourself need to come on top of that," Mr Klonowski says.

He urged me to consider the lifestyle I want when I retire and plan accordingly.

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Mind the gap

With this in mind, I set myself a target of 25,000 annual income.

My previous pension plans will pay about 2,800 a year and me and my wife will receive around 8,700 in state pension.

This leaves a gap of 13,500 in today's money.

So how much would I have to save to close this gap?

Tom McPhail, head of pensions research at Hargreaves Lansdown, says I need a retirement savings pot of 270,000 to receive an annual income of 13,500 and achieve my goal.

That is a lot of money. But the tax benefit of pension saving could bring the target figure down.

Also, the money you can put in goes up after you have paid off the mortgage and the kids have left home. So I don't have to worry too much that I cannot put 700 a month aside today.

Over the long term, though, both the capital value of the property and the rental income should go up, making buy-to-let a balanced investment
Lee Grandin, Landlord Mortgages

Now that I have a goal, how do I achieve it?

Property as pension

My first thought was that my home may be my pension.

Buy a big house, pay off the mortgage as fast as you can and when you retire sell it off and move to a cheaper place.

But selling your property means you have to buy again too.

Depending on where you want to buy and the size of the property, the money you can take out of the process may not be enough.

You don't have to worry about Capital Gains Tax, but there is the risk of your property not selling quickly or for the price you need.

There is also the emotional side to it. Can you sell up the family home and move out of the area?

Of course there are equity release schemes, in which you sell part of your property whilst you keep living in it.

Upon selling or death, a percentage of the proceeds goes to the scheme.

But some of these schemes have acquired a bad reputation, so although there are quality schemes out there, the idea needs to be approached with great caution.

Follow the crowd?

According to Mr Klonowski, the money in your property is often overlooked when planning a retirement.

But I would rather consider this a nest egg than part of my core retirement savings plan, as I may not want to sell up in later life.

Increasing numbers of Britons seem enamoured with buy-to-let investment.

Would I be sensible to follow the crowd and buy into buy-to-let?

Yet according to Lee Grandin, managing director of Landlord Mortgages, buy-to-let is a supplement to a traditional pension, not a replacement.

As an investment over a long period of time - 30 years in my case - the potential to have a good return is there.

"Buy-to-let is an investment which combines both capital growth and income.

"When property prices drop, the rental income becomes proportionally larger. However, when prices rise the rental income becomes proportionally smaller.

"Over the long term, though, both the capital value of the property and the rental income should go up, making buy-to-let a balanced investment," Mr Grandin said.

Exit plan

Buy-to-let is very hands-on. The more you are willing to do a property up, the higher the potential profits.

It is risky, though.

You need to spend a lot of time doing your homework - and even then there is the chance of buying the wrong property.

And you need an exit plan to deal with cash flow requirements. Do you need a lump sum at retirement or do you want someone to continue collecting rental income for you?

According to Mr Grandin, buy-to-let averages a yield of 6%, with a net yield of about 1.5% if you take typical mortgage interest into account.

But when selling, there will be Capital Gains Tax to pay, with profits from the sale of a second home taxed at up to 40%.

In addition, income tax will be payable on the rental income, although mortgage interest can be offset against this.

Semi-detached house
Property can bring hidden expense

Management costs, at an average of 14%, take a huge bite out of any rental yield to be had.

The buy-to-let market really took off in the late 90s.

It is a young market, and there is no historical context to properly gauge what would happen if a downturn was to occur.

Who is to say the market is not already overheated? A warning sign may be that lenders have been upping the amount of money they will lend investors.

Also remember that in 30 years there will be fewer youngsters to buy the houses the current 40-50 year olds will be selling.

Interest rates are at a historically low level. Who is to say that they will not start to rise again soon?

After weighing everything up, I decide buy-to-let is not for me. There is the danger that the property could lie empty for long periods and the market could suffer a downturn.

In addition, ploughing all my cash into property is an undiversified strategy. It is not a good idea to have all my eggs in one basket.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

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