Buy to Lets help secure retirement!

A regular income is vital in retirement, with bricks and mortar providing one of the most popular ways for people to finance life after work.

Rising property values in many areas, combined with rents at a record high and low mortgage rates, have made property an appealing option for anyone looking to supplement pension income.

Recent research by insurer Aegon reveals the amount of income people hope to retire on each year has risen from £35,000 to £42,000. This would require a pension pot of more than £1 million, a sum higher than the new lifetime pension allowance.

Turn a second home into a pension

If you’ve ever thought about your financial future, you will have wondered whether to become a buy-to-let landlord.

Few people are in a position to save anywhere near enough to provide this sort of income when they stop work. This is where a buy-to-let property may help, providing you with an income and possible capital growth in the long term.

For example, if you are young, you could invest in a buy-to-let property and rely on capital growth to provide you with a lump sum when you sell the property and retire. You could then invest this money to provide you with an income when you stop work.

Will bricks and mortar give you a secure retirement?

One of the major advantages of buy-to-let property is what is known as 'gearing'. For example, if you put down a 25 per cent deposit, and the property rises in value by 2 per cent a year, your gains effectively multiply to 8 per cent. In other words, your equity in the property has risen from £25,000 to £27,000 — the 8 per cent rise.

But if property prices drop, 'gearing' can be disastrous, as losses will also be multiplied. Remember, any profit you receive when you sell will be subject to capital gains tax depending on your income, although each year everyone gets a CGT allowance — currently £11,100 — that they can use to set against their capital gains.

CGT can have a big impact on the amount of profit you'll actually end up with. If you're a basic rate taxpayer, you will pay CGT at 18 per cent on any gains after your annual CGT allowance, or 28 per cent if you're a higher rate taxpayer.

This means that if your property value rose spectacularly during the period you owned it, as many have done, you could be forced to pay some of your gain at the higher rate — even though your income may mean you're just a basic rate taxpayer.

Rent is the key to a steady income

CGT is, of course, less of a concern if you are planning on investing in buy-to-let property when you are older, perhaps in your 50s or 60s, to provide you with a steady income when you stop work. Indeed, if you are in this situation, you should be more concerned with how much rent your property generates.

According to the latest Buy-to-Let Index from Your Move and Reeds Rains estate agents, the average rent across England and Wales hit a record high of £774 a month in April, or £1,204 for London.

The gross rental yield — the annual rental income divided by the property's value — on a typical rental property in England and Wales is currently 5.1 per cent. Bear in mind, the gross yield does not take into account the costs of owning the property such as any mortgage, maintenance or letting agents' fees.

You pay income tax on any rental income, although some expenses can be offset against this.

Adrian Gill, of Your Move and Reeds Rains, says: 'The average landlord has seen a return, before deductions, of £15,503 over the past 12 months. Within this figure, rental income makes up £8,247, while the average capital gain amounts to £7,256.'

It is important, however, not to put all your eggs in one basket, so annuities and income drawdown should also form part of your overall retirement planning, and you should always obtain advice from an Independent Financial Adviser.