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I am in the UK and hoping to retire in a few years.

I am aware that pension rules have changed recently so an annuity is now not my main option for an income - due to my age annuity would only yield about 3% per annum which is pretty poor.

I am considering drawing the pension pot (possibly over a few years to minimise the tax payable) and buying properties to rent out.

I can get a return of around 10% per annum by doing this but I am aware that this isn't guaranteed and there may be some "issues" along the way, ie bad tenants etc.

Finally I am looking at peer to peer lending that I have heard can offer returns of 7-9%, again not guaranteed.

Are there any other opportunities that I need to consider? I may opt for a combination of all of these options to spread my risk, my pension pot will probably be around £200k when I retire so not huge, I need to get income of £1k monthly to retire, obviously more is better!

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I can think of one major income source you didn't mention, dividends. Rather than withdrawing from your pension pot, you can roll it over to a SIPP, invest it in quality dividend growth stocks, then (depending on your pension size) withdraw only the dividends to live on.

The goal here is that you buy quality dividend growth stocks. This will mean you rarely have to sell your investments, and can weather the ups and downs of the market in relative comfort, while using the dividends as your income to live off of. The growth aspect comes into play when considering keeping up with inflation, or simply growing your income. In effect, companies grow the size of their dividend payments and you use that to beat the effects of inflation.

Meanwhile, you do get the benefit of principle growth in the companies you've invested in. I don't know the history of the UK stock market, but the US market has averaged over 7% total return (including dividends) over the long term.

A typical dividend payout is not much better than your annuity option though -- 3% to 4% is probably achievable. Although, looking at the list of UK Dividend Champion list (companies that have grown their dividend for 25 years continuous), some of them have higher yields than that right now. Though that might be a warning sign...

BTW, given all the legal changes around buy-to-lets recently (increases stamp duty on purchase, reduction in mortgage interest deduction, increased paperwork burden due to "right to rent" laws, etc.) you want to check this carefully to make sure you're safe on forecasting your return.

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    I would add: rolling into a SIPP is an option if you want to keep paying in to your pension – you can keep contributing (and receiving tax relief) until age 75. But when you want to start taking a regular income, this is called drawdown. You have the option of leaving 100% of the capital invested and taking income from dividends etc. as this answer suggests, or you can withdraw your capital too, although your money runs out faster this way. It is also worth mentioning that this answer seems to suggest a 100% stocks portfolio which IMHO is a bit risky for a retiree. – marktristan Jan 14 '16 at 15:15
  • In fact, I worded things specifically to leave out any discussion of total income or portfolio percentage to invest in shares. The OP already said he was looking for other opportunities to consider, and that he may opt for a combination of all options to spread risk, so I didn't feel I needed to reiterate there. That said, FWIW, I think anyone retiring for a long period of time (20+ years) will have issues if they aren't heavily biased in their investments with types that provide a return which beats inflation. Stocks are one of those that historically does beat inflation. – davmp Jan 14 '16 at 16:32
  • Thanks, I suppose the trick is picking the right stocks. The UK stock market is relatively poor performing compared to the US, it still hasn't recovered from when the dot com bubble burst. I suppose I can pick foreign companies though. – davidjwest Jan 15 '16 at 8:35
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If you withdraw all (or most) of your pension 25% is tax free but the rest is treated as income upon which you will pay income tax at the usual UK rates.

Withdrawing a lump sum to buy property is therefore unlikely to be 10% per annum as you'll spend years making up lost ground on the initial capital investment.

If your pension is a self invested personal pension (a SIPP) you could buy property within the pension wrapper itself which would avoid the income tax hit. if you don't have a SIPP you may be able to convert your pension to a SIPP but you would be wise to seek professional advice about that.

The UK government is also introducing an additional 3% stamp duty on properties which are not your first home so this may further impact your returns. This would apply whether you withdraw your pension as cash or buy the property within a SIPP.

One other alternative to an annuity in the UK is called drawdown where you keep the money invested in your pension as it is now and withdraw an annual income. This means your tax bill is reduced as you get to use your annual allowance each year and will also pay less higher rate tax.

The government provides more details on its website.

  • You don't have to drawdown or withdraw your pension to buy property -- unless you need a mortgage -- because you can own property in a SIPP. In some parts of the UK, the OP's stated balance is enough to buy property outright. But like you say, there are probably capital outlays in getting a newly purchase property ready for rental. – davmp Jan 15 '16 at 10:04
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I agree that you should CONSIDER a shares based dividend income SIPP, however unless you've done self executed trading before, enough to understand and be comfortable with it and know what you're getting into, I would strongly suggest that as you are now near retirement, you have to appreciate that as well as the usual risks associated with markets and their constituent stocks and shares going down as well as up, there is an additional risk that you will achieve sub optimal performance because you are new to the game.

I took up self executed trading in 2008 (oh yes, what a great time to learn) and whilst I might have chosen a better time to get into it, and despite being quite successful over all, I have to say it's the hardest thing I've ever done! The biggest reason it'll be hard is emotionally, because this pension pot is all the money you've got to live off until you die right? So, even though you may choose safe quality stocks, when the world economy goes wrong it goes wrong, and your pension pot will still plummet, somewhat at least. Unless you "beat the market", something you should not expect to do if you haven't done it before, taking the rather abysmal FTSE100 as a benchmark (all quality stocks, right? LOL) from last Aprils highs to this months lows, and projecting that performance forwards to the end of March, assuming you get reasonable dividends and draw out £1000 per month, your pot could be worth £164K after one year. Where as with normal / stable / long term market performance (i.e. no horrible devaluation of the market) it could be worth £198K! Going forwards from those 2 hypothetical positions, assuming total market stability for the rest of your life and the same reasonable dividend payouts, this one year of devaluation at the start of your pensions life is enough to reduce the time your pension pot can afford to pay out £1000 per month from 36 years to 24 years. Even if every year after that devaluation is an extra 1% higher return it could still only improve to 30 years. Normally of course, any stocks and shares investment is a long term investment and long term the income should be good, but pensions usually diversify into less and less risky investments as they get close to maturity, holding a certain amount of cash and bonds as well, so in my view a SIPP with stocks and shares should be AT MOST just a part of your strategy, and if you can't watch your pension pot payout term shrink from 26 years to 24 years hold your nerve, then maybe a SIPP with stocks and shares should be a smaller part! When you're dependent on your SIPP for income a market crash could cause you to make bad decisions and lose even more income.

All that said now, even with all the new taxes and loss of tax deductible costs, etc, I think your property idea might not be a bad one. It's just diversification at the end of the day, and that's rarely a bad thing. I really DON'T think you should consider it to be a magic bullet though, it's not impossible to get a 10% yield from a property, but usually you won't. I assume you've never done buy to let before, so I would encourage you to set up a spread sheet and model it carefully. If you are realistic then you should find that you have to find really REALLY exceptional properties to get that sort of return, and you won't find them all the time.

When you do your spread sheet, make sure you take into account all the one off buying costs, build a ledger effectively, so that you can plot all your costs, income and on going balance, and then see what payouts your model can afford over a reasonable number of years (say 10). Take the sum of those payouts and compare them against the sum you put in to find the whole thing. You must include budget for periodic minor and less frequent larger renovations (your tenants WON'T respect your property like you would, I promise you), land lord insurance (don't omit it unless you maintain capability to access a decent reserve (at least 10-20K say, I mean it, it's happened to me, it cost me 10K once to fix up a place after the damage and negligence of a tenant, and it definitely could have been worse) but I don't really recommend you insuring yourself like this, and taking on the inherent risk), budget for plumber and electrician call out, or for appropriate schemes which include boiler maintenance, etc (basically more insurance). Also consider estate agent fees, which will be either finders fees and/or 10% management fees if you don't manage them yourself. If you manage it yourself, fine, but consider the possibility that at some point someone might have to do that for you... either temporarily or permanently. Budget for a couple of months of vacancy every couple of years is probably prudent. Don't forget you have to pay utilities and council tax when its vacant. For leaseholds don't forget ground rent.

You can get a better return on investment by taking out a mortgage (because you make money out of the underlying ROI and the mortgage APR) (this is usually the only way you can approach 10% yield) but don't forget to include the cost of mortgage fees, valuation fees, legal fees, etc, every 2 years (or however long)... and repeat your model to make sure it is viable when interest rates go up a few percent.

  • For anyone besides the OP reading, I want to point out that the first two paragraphs above appear to miss that the goal of a dividend growth portfolio is to withdraw, or live off, the dividend income only. You certainly do not sell your investments. Thus, market downturns and price fluctuations don't effect you UNLESS your holdings cut their dividend (which is quite possible, but apparently rare-ish for quality companies) At which point you sell that company and buy another one. If the "growth" part is working out, you can weather the occasional times you have to sell into a downtrend. – davmp Jan 28 '16 at 22:05
  • As clarification to the above comment, the OP's pension of £200k is likely not large enough for him to live off of at the level he wants (£1k/month) using the standard modeling of a dividend growth portfolio, so your examples of having to drawdown principle are completely valid for the OP. – davmp Jan 28 '16 at 22:07
  • One more comment, sorry. If the whole fund went toward newly purchases shares now, the OP is probably looking at £6k to £7k / year. On the other hand, if he had bought those shares while he was building up the fund, so they've had a good 10+ years of time in the market, they MIGHT have a YOC (Yield On Cost) now that would meet his goals. – davmp Jan 28 '16 at 22:14
  • Yes, I agree, my answer reflects the use of the dividend based SIPP, in a way that a pension fund may often be used, in order to achieve the maximum income over a defined time, whilst gradually eroding the capital. I agree with the principal of not selling investments, but selling SOME of them to SOME degree to fund down draw is normal, and selling sometimes to change investment sometimes is usually part of portfolio management. And 'blue chip' companies can and do cut their dividends sometimes, though as you say some have maintained continuous rise all through the credit crunch. – Michael Jan 28 '16 at 22:39
  • I also think your YOC suggestions are reasonable, but with appropriate levels of draw down, the OPs minimum income goal probably could be achieved if he doesn't plan to live much older than 100. The principal of improved YOC from buying over 10+ years is ok, although I expect that's part of what achieved a pot of 200K in the first place, meaning I presume less than 200K was actually put in anyway. However one of the main points of my answer was to make it clear that I thought the whole thing was a bit risky for a new investor, and maybe a little tight for anyone even. – Michael Jan 28 '16 at 22:47

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