Pension and Property?

In: Business and Management

Submitted By vivienne9253
Words 1208
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Article Analysis
—— Pension and property?1
Written by ZOU Yue, DENG Ziqing, CHEN Mengfei Nowadays, the world is facing with a same question, aging population. As a following question, pension has caught world’s attention. Moreover, it seems that old pension policy cannot afford a comfortable retirement due to the rising house prices and inflation. Compared with pension, the article “pension or property – what’s the best plan for retirement” discussed a new way that some people may rely on for their retirement, which is investment in property. From the article, numbers of people decided to depend on property, buy-to-let properties or sell themselves-use properties, to provide an income for their retirement, rather than pensions as traditional. Because pension schemes with uncertain return would lock away their money until they are retired, and refund them with pool value at final. It is reasonable that pensions may have lower return than investment. We can get this conclusion by using a simple model. Suppose that an individual’s lifetime has two periods, then we denote rA as the annuity rate, rP as the yield rate of property, s1 means how much money the individual saves as pension, i means the amount of money individual invest in property, y1 is the income in period 1, c1 is the consumption in period 1. We have y1-c1= s, where s is equal to i. Therefore the individual will have the return on pension in period 2 which is s(1+r A), or have the return on property in period 2 which is i(1+rP). The return of property would be higher than pension, if rP>rA. In fact, the present average rental yields of UK properties is around 5% to 6%i (adjusted inflation), and the present the nominal interest rate in UK is only 0.5%ii. However, pension funds have provide some pension annuities which annuity rate would be between 3%-5%iii. It is obvious that the return of property would…...

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