Property vs Pension Funds

[Firefly]

First off, a note to the mods, I do not want to breach the posting guidlines regarding property prices. I'd like to start a discussion regarding property vs pension funds as a means of retirement planning if I may.

Having watched the rte program "Pensions Shock" last night, I was amazed that the lady who, along with her employer, had built up a pension fund valued at 200k was only going to receive 93 euro a week. This equates to about 400 euro per month. The program showed that upto a third of her fund (and over half of other funds) was wiped out due to charges & fees. In addition pretty poor performance of the fund itself didn't help.

Although property is certainly out of fashion at the moment, for the long term investor does it not provide a better alternative? Off the top of my head:

• Annual charges are limited to: management fees (for apartments), some upkeep, property tax, rental agency fees (if used). I would ask any seasoned landlords to provide average costs for these
• The property produces rent soon after it is bought helping to fund itself (if a mortgage is required)
• Property can be sold at anytime and the owner gets the full amount

As mentioned, the lady's fund was approximately 200k but only produced a pension of approx 400 euro per month. This 200k could purchase a property that would produce a rent of over 700 euro even in today's market.

What do people think?

 

[DerKaiser]

Good questions.

First off, the €93 per week is shocking on a fund of €200k. I can only assume she is retiring early, has a spouses pension chosen and has locked in a guaranteed rate of increase (3% per annum perhaps).

I was also shocked that she had paid so much in over so long and was down money. I could only conclude that she ramped up contributions considerably in recent years when losses were greatest. If you'd bought property directly, you'd obviously also be sitting on a large loss versus what you'd paid in.

Another point is that much of the €200k in the pension is made up of tax relief on contributions, and probably an employer matching those gross of tax contributions. You could only have invested the after tax proceeds in direct property with no employer participation.

Also, the income on the property would be subject to your full marginal rate of tax whilst the pension builds up tax free up to retirement.

The main issue, however, is the investment return. If you want a safe retirement income (I'm talking AAA rated safe) you can expect to earn little more than 2% on your fund. If you can earn a 5-6% "safe" rental yield, why wouldn't it be tempting to invest in property?

One major issue is that the state is the major driver of private rents and it is looking to save hundreds of millions. Another issue is whether a flood of completed NAMA apartments would further dilute yields. This has nothing to do with property prices, as god knows what is factored into them already, just a rental market outlook.

If it was me and I had a choice, I'd find it very hard to stomach locking in a retirement income based on low german bond yields.