Rising rents and cheap mortgages have made buy-to-lets more popular than ever. Could property be your new pension fund?
There has been no shortage of bad news this week but a more tangible horror has also been revealed.
One in five people who retire in Britain this year will fall below the income poverty line.
However, only one in seven will be completely dependent on the state pension, which means that around six per cent entering income poverty will have some sort private pension.
These statistics really underline the pension crisis in Britain at the moment.
Even if you have saved into a private pension fund your entire working life, the parameters are shifting: we are living longer in an age of (in the words of Sir Mervyn King) “stubbornly high” inflation.
This means that over the last three years, the pension fund needed to buy an income of £5,000 year in retirement has risen to £152,800.
Amid a global financial crisis which has seen the value of annuities dip, and stock markets only recently returning to positive territory, few people will have been able to keep up.
So it is little wonder that a recent survey of business leaders found that only five per cent are happy with the current pension system.
As a result, most are looking at alternative ways of funding their retirement: investment portfolios, Isa savings, and buy-to-let.
:: Buy-to-let benefit
In fact, the buy-to-let sector is booming. According the Council of Mortgage Lending, in the first quarter of this year, 33,500 mortgages worth £4.2bn were granted to landlords in the UK, up from £3.7bn in the first quarter of last year. This brings the total number of buy-to-let mortgages in the country to 1.46m.
And yet, the market is far from saturated.
Generation Rent has created a growing demand for high-quality rented accommodation, and tenants are prepared to pay well for a good base.
Many tenants now spend around 50 per cent of their post-tax income on rental costs, and rental prices are still rising in response to demand.
Bad news for tenants, but it is a perfect storm for landlords seeking inflation-beating returns.
In April, the average rent paid in England and Wales rose for the first time since 2011, to £736 per month; a 3.9 per cent year on year increase. Based on current trends, this means that the average landlord could make a total annual return of £9,496 per property over the next 12 months.
:: Capitalising on low interest
Low interest rates and rising inflation means that few savings accounts can offer decent returns to pension-minded savers.
Even though inflation dropped last month, there are still only seven savings accounts on the market which beat this rate. If consumer inflation rises, as predicted, to 3.2 per cent later this year, not a single savings account will be able to offer a real-terms return on your money.
Austerity measures are set to continue until at least 2018, while the Bank of England has predicted that inflation will remain high until at least 2016, so if you expect to retire in the next few years, you should already be thinking about how to supplement your state pension, and private pension fund.