Direct real estate in pension phase

Real estate can be held while a fund is in pension phase.  One advantage of real estate in pension phase is that lease payments may exhibit less variability than other asset classes, which may make them particularly attractive for supporting an income stream.  However, it is important that trustees and members understand that eventually the minimum pension drawdown rate is likely to exceed the net yield from real estate.  

In the younger pension ages, the minimum pension drawdown rate is 6% or less before age 80.   In more advanced ages, the minimum pension drawdown rate is increases to 7% (at age 80) then to 9% (at age 85) then to 11% (at age 90) and then to 14% (at age 65).  Consequently, the problem of the net yield on the real estate being less than the minimum pension drawdown rate is likely to occur from age 80.  

This does not mean that direct real estate cannot be held in pension phase – merely that the liquidity requirements of the pension must be understood and possibly advance planning undertaken.  

Also trustees and members must understand that the minimum pension drawdown requirement is based upon the capital value of the pension account and is not related to the level of investment earnings.  If the net earnings for a financial year are very modest - say less than 2% (or even negative) – the minimum pension drawdown must still be paid.  This may necessitate dipping into capital to satisfy the minimum pension drawdown.  To address this risk, a portion of the pension account is usually represented by cash or highly liquid investments which may represent 12 months’ or more worth of pension payments.