Are buy to lets the key to new international pensions?
A reliable offshore international pension plan is likely to be high up on most expat wish lists nowadays, with employment uncertainty meaning many may also be forced to take the early retirement route, something which can play havoc with retirement income projections.
A pension is in essence a savings plan, in the UK this will have certain tax advantages which are allowed by the government “wrapped around” the plan. In return for such pension tax breaks, the UK Inland Revenue will set limits on how the pension fund can and should be accessed – drawdowns are not possible before certain dates, drawdowns once allowed must be within certain limits and on death any remaining fund is likely to be heavily taxed at rates of up to 55%, depending upon individual circumstances. There will also be strict rules surrounding the purchase of annuities, which are bought by the fund to provide an income to the pension holder.
Onshore, many will look to start an international pension modestly – a contribution of perhaps £500 per month plus a matched employer’s contribution could form the basis of a viable plan, if started early enough. The rules for offshore and international pensions are far more onerous on the saver, but increasingly seem to be biased towards the expatriate who is in a position to start a plan with a significant lump sum down payment. Many international pension providers will not offer an offshore pension plan unless the opening deposit is at least £25,000. Many advisers will say that the fees even at this level will eat into the capital, so in fact, a better goal might be to aim for an initial deposit of over £50,000.
Deposit accounts are unlikely to be a viable alternative in the long term – most are still paying a rate of interest significantly below inflation rates, so are losing money in real terms.
Which leaves many expats in a dangerous position – unable to start a pension and uncertain about where or when they might retire.
So could a buy to let be the answer? Yes think several financial advisers, but with the proviso that it may not be for everyone. For a start, you have to establish yourself as a credible bidder and from overseas, that is not always easy. Expat property search agents work for the buyer and help you to negotiate with both estate agents and mortgage brokers. In return, as a buyer, you will pay a small fee, normally 1%, which if they get the property choice right can be money very well spent. Erica Evans of Expatfindaproperty.com notes, “Many expat buyers are just not taken seriously onshore – they seldom have a mortgage in place and cannot easily visit property, so the local agent will almost always push a local buyer. By providing an on the ground physical presence, we can redress that imbalance.” Property owners must also think about maintenance, but again, agents such as Expatfindaproperty.com are increasingly offering to find builders and project manage refurbishments for a fixed fee
Let’s go back to the position of our expatriate wanting an international pension with £50,000 of savings. Put those funds in an international pension and allowing for fees of 1.5% and achieving a growth rate of 7% per annum average, after 5 years the fund might have reached just over £65,000, so showing a gain of around £15,000. Used as a deposit instead, the same funds would buy a £200,000 property, which depending upon location could achieve a similar 5.5% rental yield and should hopefully grow in capital terms. Prices in Merton in London and Hammersmith, for example, have risen by over 10% last year, according to the UK Land Registry data. That equates to a gain of £122,000 on the original purchase, dwarfing the performance of a pension fund. Note mortgage interest costs need to be subtracted to arrive at a net gain, but the principle is that property uses a concept known as leveraging to deliver potentially higher gains – in this case, the gain is on a £200,000 asset, not a £50,000 fund, so a 10% uplift delivers more proportionally.
Expat mortgage brokers Offshoreonline.org managing director Tim Harvey adds, “Expats should budget on a deposit of 25% for their house purchase or 30% for interest only deals. Banks are also reluctant to lend on properties valued at less than £125,000 to £150,000, but at such levels, it is certainly possible to add a good quality buy to let as part of your international pension planning portfolio.