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Paddles

Property As A Pension

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I've asked this on the "Krusty" thread, but I reckon it deserves it's own thread;

Ok, we're back onto the "property is my pension" conversation again, so I'm going to ask the question I've asked before here and not yet seen a worked through answer.

At what point does property actually work as pension?

Specifically, let's take an average Joe Public, 30 years old looking to retire at 65, with an annual income in retirement of £40,000 and an assumed life expectancy to 90 years old and inflation equally affecting property and everything else at 4% (no, go on, humour me!).

So, how much property would he need to accumulate (let's assume I/O loans) before he's got a big enough lump sum to buy an annuity that will keep him living reasonably well in his old age?

I've had a go at the calculations and reckon it's about 10 or 11 properties, 1 bought every 3 years or so at today's price of £120k (obviously that price has increased with inflation each time he goes to buy the next).

Now, I'm no actuary (thank God), so my numbers aren't to be relied on, but even so, assuming that someone could continually get credit every three years at at least break-even costs for more and more property feels like a really dangerous assumption to base your future on.

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Specifically, let's take an average Joe Public, 30 years old looking to retire at 65, with an annual income in retirement of £40,000 and an assumed life expectancy to 90 years old and inflation equally affecting property and everything else at 4% (no, go on, humour me!).

Joe needs to talk to an actuary & a psychiatrist. In either order.

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When pensions were bought in there were 40 workers per pensioner. Now there are only 4.

As this will increase to about 2:1 there's little chance of property working as a a pension.

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Joe needs to talk to an actuary & a psychiatrist. In either order.

Paddles, I guess some might say the trick would be to own some flats outright (perhaps possible after 30 years) and literally live off the rental net of costs and tax.

Round here , £170k will buy you a 1 bed renting for £650 per month. To get to your £40k gross, after expenses you'd need 6 of these. Frankly that is equivalent to having capital of £1.02m. That capital would actually buy you an annuity of £60k. So it quite clear property is currently crap for this purpose.

Perhaps this may change, but I think prices need to drop by 30% just to put the yield at a remotely decent level. Of course if prices do fall, I can see there being some people who might think of getting back on the BTL bandwagon at the thought of future capital appreciation, but by then I think the rest of the public will feel sick of the sight of houses and they will keep on falling for a long while.

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When pensions were bought in there were 40 workers per pensioner. Now there are only 4.

As this will increase to about 2:1 there's little chance of property working as a a pension.

Your quoted figures say nothing about whether or not property will work as a pension. They do however call into question if the state funded pension scheme can continue, and therefore underline the urgent need of the average 30 year old to figure out some way of securing their old age.

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Paddles, I guess some might say the trick would be to own some flats outright (perhaps possible after 30 years) and literally live off the rental net of costs and tax.snip

Agree, but not sure where IO loans fit into the scheme of things.

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I've asked this on the "Krusty" thread, but I reckon it deserves it's own thread;

Ok, we're back onto the "property is my pension" conversation again, so I'm going to ask the question I've asked before here and not yet seen a worked through answer.

At what point does property actually work as pension?

Specifically, let's take an average Joe Public, 30 years old looking to retire at 65, with an annual income in retirement of £40,000 and an assumed life expectancy to 90 years old and inflation equally affecting property and everything else at 4% (no, go on, humour me!).

So, how much property would he need to accumulate (let's assume I/O loans) before he's got a big enough lump sum to buy an annuity that will keep him living reasonably well in his old age?

I've had a go at the calculations and reckon it's about 10 or 11 properties, 1 bought every 3 years or so at today's price of £120k (obviously that price has increased with inflation each time he goes to buy the next).

Now, I'm no actuary (thank God), so my numbers aren't to be relied on, but even so, assuming that someone could continually get credit every three years at at least break-even costs for more and more property feels like a really dangerous assumption to base your future on.

Why buy the annuity? If you had bought a four bed property in 1973 you would now have an asset with minimal counter party risk and a gross income of £15-£25k depending on area. It's the maintenance cost that's ambiguous.

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Agree, but not sure where IO loans fit into the scheme of things.

Hence my question; most (nearly all?) BTL loans are I/Os, right? Yield levels are pants at the moment, so I tried calculating it based on the capital appreciation over 30 years.

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Agree, but not sure where IO loans fit into the scheme of things.

Hence my question; most (nearly all?) BTL loans are I/Os, right? Yield levels are pants at the moment, so I tried calculating it based on the capital appreciation over 30 years.

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Agree, but not sure where IO loans fit into the scheme of things.

Well, I am guessing that over time that inflation would allow the owner (sorry hmm investor) to use the rent increases to start repaying the capital. Say you had the flats for ten years Interest Only, probably by then you could switch to repayment and start paying down the loans (even if over 25 years) so that they are gone by the time you retire. That said, this kind of assumes prices aren't in for a massive sustained Japanese style fall.

I met a guy the other day (quite old mid 70s) who reckons prices could fall for 30 years. I think he was born just after the depression, so perhaps his parents fused the memory of it into his psyche. Actually it is possible given the pig in the python theory and is probably no more than a lot of BTLers deserve.

I didn't ask for an explanation of whether he meant real or nominal.

Edited by mikelivingstone

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Specifically, let's take an average Joe Public, 30 years old looking to retire at 65, with an annual income in retirement of £40,000 and an assumed life expectancy to 90 years old and inflation equally affecting property and everything else at 4% (no, go on, humour me!).

So, how much property would he need to accumulate (let's assume I/O loans) before he's got a big enough lump sum to buy an annuity that will keep him living reasonably well in his old age?

Assume a 65 year old with a 60 year old wife, both non smokers, they want a pension that will increase in line with RPI, and when the man dies they want the wife to get a pension that's 66% of the original pension for the remainder of her life.

In this case the current annuity rate is about 3.7%. So to get the £40,000 you mentioned they'd need a retirement fund of about £1.08m.

Assuming a net yield of say 5% from property rentals they'd need a portfolio worth £800k (with no mortgage) to get the same income. They could reasonably expect the rents to increase in line with RPI and it would have the added advantage that when they both died there'd be something to pass on to their kids.

If the average property costs say £150k our 30 year old would need to assemble and pay for a portfolio of 5.3 properties over the next 35 years to achieve his retirement objectives.

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Assume a 65 year old with a 60 year old wife, both non smokers, they want a pension that will increase in line with RPI, and when the man dies they want the wife to get a pension that's 66% of the original pension for the remainder of her life.

In this case the current annuity rate is about 3.7%. So to get the £40,000 you mentioned they'd need a retirement fund of about £1.08m.

Assuming a net yield of say 5% from property rentals they'd need a portfolio worth £800k (with no mortgage) to get the same income. They could reasonably expect the rents to increase in line with RPI and it would have the added advantage that when they both died there'd be something to pass on to their kids.

If the average property costs say £150k our 30 year old would need to assemble and pay for a portfolio of 5.3 properties over the next 35 years to achieve his retirement objectives.

Silversurfer, its about the same as my 6 properties, so I think we agree.

That said, I am shocked at how low annuity rates are, I thought they were higher. That said, I think your yield figure for property is a bit to high, though if you include a few Houses In Multiple Occupation or Students lets then yes it is achievable. Most property I see only yields 4%, though HMOs can do 9%.

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That said, I am shocked at how low annuity rates are, I thought they were higher.

If you forego any increases in future years, and it's "single life" only (so no income for a surviving partner) then 7 to 8% annuities are available, even higher for smokers or claimants with impaired health.

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If you forego any increases in future years, and it's "single life" only (so no income for a surviving partner) then 7 to 8% annuities are available, even higher for smokers or claimants with impaired health.

nothing to pass on though, if you die tomorrow, tough $h%^, your million is gone. i know which i would rather.

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nothing to pass on though, if you die tomorrow, tough $h%^, your million is gone. i know which i would rather.

That is why I currently think cash is king. Property is certainly a pauper in the gutter at the moment.

Cash gives 6%+ yields and doesn't run the risk of capital loss that you have with property.

Edited by mikelivingstone

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nothing to pass on though, if you die tomorrow, tough $h%^, your million is gone. i know which i would rather.

Actually the cost of guaranteeing an annuity for five or even ten years is negligible, but I take your point!

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That is why I currently think cash is king. Property is certainly a pauper in the gutter at the moment.

Cash gives 6%+ yields and doesn't run the risk of capital loss that you have with property.

When credit's tight cash is always king. But no investment's perfect and cash carries some risks too.

1. Inflation, especially if you're retiring early or in excellent health. Inflation can whittle your retirement pot down in pretty short order.

2. Devaluation, to enjoy dividends you have to hold your cash in a currency, and any currency could take a tumble against other currencies.

3. Confiscatory taxation, the bills are piling up for both this and the next government. Unless services are cut then someone will have to pay, "unearned income", ie investment income, has been taxed at 97% in my life time. Maybe it'll happen again?

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£40,000 at today's prices is a pretty good pension, assuming that you have already bought your own property outright by then and have limited outgoings.

If I wanted to have a property as pension and use it to generate £40k p/a, I would need 3 houses, renting for £1200 p/m at current rates. Assuming rents rise with inflation over 25 years and you use a repayment mortgage on them, they would start generating a decent income in about 10 years. After 20, most of the rent is pure income. By the time Mr Joe is 55, he will be able to save all of this income, assuming he is still in work.

By 65 he would have several hundred thousand in the bank and an annual income of about £40,000 at current price levels and 3 properties to leave to the children.

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This thread illustrates just how far BTL has entered the national conscious. Here we are on a forum that's happily anticipating the property crash, but there's still plenty of people thinking, "I know it was madness to get into BTL in 2004-2007 with a 100% mortgage, but what if property crashes 30%, or 40%, or 50%? Without a final salary pension scheme I still have to do something to secure my old age, maybe I should be thinking about getting into BTL when the dust has settled on this crash?"

Seems to me that there's very few scenarios for the next decade or two,

1. We have the crash, but credit subsequently stays tight. In that case cash really will be king. So anyone who can raise some cash (for example all the retiring baby boomers who can take 25% tax free from their pension funds) could easily become landlords on the cheap.

2. We have the crash, and then credit subsequently relaxes. In that case an army of people, who learnt the lessons of how to make easy money through property, pile in to leveraged BTL and the market bounces back to 2007 levels in just a couple of years.

3. The only realistic route to keeping a lid on BTL would be to re-introduce legislation that strengthens tennant's rights. But it's difficult to see the next government doing anything like that.

In other words, I don't see how the BTL cat is going to be put back in the bag. Consequently the current 70% UK owner occupancy level looks likely to drift back to the 50-60% levels that we see in France or Germany. Maybe the dream of property ownership is likely to remain a dream for many more people in the future, and we'll just have to get used to nearly half the population becoming permanent renters?

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Would anyone talk of borrowing money to buy shares as a pension? Or any other asset apart from property?

It must all depnd on price and debt. You could pay off the mortgage on a small house in say 10 years, then buy another to live in. The 2nd house would be paid off quicker thanls to the rental from the first house. Then add another etc. Keeps the debt down to a servicable level and has a view to the future that doesn't care about resale values, only the cost of buying.

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People today are certainly not the first people to be suckered into this buying property for your pension bullsh!t!

For example, here's a quote taken from a book which refers to the property boom (and subsequent slump) beginning in the late 1890s:

"The great housing boom at the turn of the century had been one of houses built for investment purposes. They had proved an attraction to the smaller investors such as retiring tradesmen, who had felt their savings would be safer in bricks and mortar than in less tangible stocks and shares."

Sound familiar - Victorian suckers! :lol:

I have also t started threads previously about other speculative booms from the past, this is yet another example!

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I don't see how property is different from shares at a basic level.

HPI = increase in share price

Housing crash = share price collapse

Rental income = Dividend Yield.

How are long-term stocks with a high dividend any worse than property?

In fact they're a lot better:

- Plenty of dividends are higher than rental yield.

- No mortgage, allowing compound interest to have an effect over a longer time period (This is the crucial part that pension plans really need)

- Saftey through Diversity... if one of your shares crashes, any non-moronic investor will have 10 others to pick up the slack. If the housing or rental market takes a downturn, all 12 of your BTLs get hit.

- Depending on where you put your money, it can also be more ethical and useful to society than making money by being a greedy piece of landlord scum.

- Less hassle. Being a landlord requires either effort on your part or erosion of your rental yield via an agent. Shares do not require maintenance

I think what it comes down to is the fact that Joe Public is a bit of a retard when it comes to figuring out how stocks and shares work. (to be honest, I'm still a bit rusty on them myself). Buying a house is something that they've done before and therefore feel confident about doing again.

Edited by DementedTuna

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£40,000 at today's prices is a pretty good pension, assuming that you have already bought your own property outright by then and have limited outgoings.

If I wanted to have a property as pension and use it to generate £40k p/a, I would need 3 houses, renting for £1200 p/m at current rates. Assuming rents rise with inflation over 25 years and you use a repayment mortgage on them, they would start generating a decent income in about 10 years. After 20, most of the rent is pure income. By the time Mr Joe is 55, he will be able to save all of this income, assuming he is still in work.

By 65 he would have several hundred thousand in the bank and an annual income of about £40,000 at current price levels and 3 properties to leave to the children.

seems to me though that any excess money generated on a BTL seems to be spent on sharp suits, press campaigns and Lamborghinis.

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  • 401 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
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      • Even
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      • up 5%



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