HSBC Investments Centre

A healthy income is key to financial security in retirement. Currently around three quarters of people retiring each year use their pension pot to buy an annuity, which pays a regular, fixed income and may be boosted by savings and other investments.

Apart from a few exceptions - for those with very small or very big pension pots –until recently most people who saved into a defined contribution pension scheme purchased an annuity at retirement.

However, the pensions system is being radically overhauled, giving more flexibility and choice. From next April, all of the changes will be in place and everyone retiring at the age of 55 or over will be able to withdraw some or all of their pension pot and have complete freedom in how they invest it.

Income from buying to let
This has led to views that some may use their pot to invest in buy-to-let property as a way to boost income. While interest rates on other forms of savings currently remain low, house prices are still rising almost universally and demand for private rented homes is as strong as ever. However, the potential of returns from letting a property may seem more attractive compared to other forms of investment, in some areas, yields have dropped as rental income simply can't keep up with soaring house prices.

This problem is particularly acute in London and the south east, where property is the most expensive and, according to estate agency Chesterton Humberts, yields have dropped to as low as 2.4%.

Yet the picture is often very different outside the capital. Research published in May from HSBC showed Southampton, Manchester and Nottingham were the top buy-to-let hotspots, producing gross yields of up to 8.73%. When buying, it's important to consider long-term price growth as well as rental income.

Mortgage implications
You will, of course, require sufficient funds to purchase a property and any shortfall will have to be made up with a buy-to-let mortgage. This will add to the risk - and your monthly outgoings. Although the newly introduced Mortgage Market Review rules don't apply to buy-to-let mortgages, there are concerns that more stringent affordability criteria might affect this type of lending. As yet it's too early to tell.

Even if you're in a position to buy a property outright, consider carefully the risk element of putting all your eggs in one basket.

"While property is attractive to investors because it is tangible and people understand it better than stocks and shares, it is important to spread your investment risk particularly as property prices can go down as well as up,"

advises Nicholas Ayre, managing director of buying agency Home Fusion.

Paul Smee, director general of the Council of Mortgage Lenders, believes that this form of investment isn't the answer for everyone. "Let's not get carried away with speculation about all this cash going into buy-to-let," he said. "We need to consider the reading of risk; with the average size of a pension pot at well below £30,000 there is no easy one-stop investment answer. Let's not pretend that there may be."

Whatever you may decide to help boost income, it's worth exploring all the potential risks and hidden consequences that may arise from investing your pension pot, such as tax implications and or losing the money that is for the long term.

We are here to help
If you are interested in the opportunity of investing in the UK property market, we have a range of Buy to let mortgages that could help.

There are numerous ways you could invest your money, to understand if it is working hard enough for you, try our Grow your wealth tool to see what paths you could choose.

Important information

All investments carry some risk. The value of investments (and any income received from them) can fall as well as rise and you may not get back what you invested.

Think carefully before purchasing a Buy to Let property. Remember, you are responsible for making the monthly payments even when the property does not have a tenant. Not all properties will grow in value or provide sufficient income to cover all your associated costs.

Your home may be repossessed if you do not keep up repayments on your mortgage.

The value of any tax implications described depends on individual circumstances and tax rules may change in future.

Pension funds into property?