Pensions do not always meet the expectations of new retirees. How can you increase your income? Real estate can be the solution, even if the investment was not planned in advance.
Article published in Les Échos on September 30, 2022. By Laurence Boccara
In retirement, it is almost always necessary to have supplemental income to boost a “dwindling” pension eroded by the rising cost of living. For those preparing to leave professional life and who will receive a sum of money following the sale of their business assets (commercial premises, office, factory), there is still time to opt for an investment capable of generating immediate income.
Buying SCPI shares in cash
Investing in shares of real estate investment trusts (SCPI) can be an immediate solution for generating supplemental income, especially if retirement preparation was not planned in advance or if the accumulated savings are insufficient. The benefits? SCPIs allow you to collect rental income paid on fixed dates, often “one month after the end of each calendar quarter,” according to Primonial. From the date of subscription, a vesting period (from two to six months, depending on the vehicle) must be taken into account before starting to receive these payments.
This investment allows for investing in income-producing real estate while being free from property management concerns. According to the latest figures from the IEIF and Aspim, this asset class (excluding residential real estate) yielded an average of 4.45% net of management fees in 2021.
The so-called “yield” SCPI is a good diversification tool, as it allows for investment in real estate assets other than residential (shops, clinics, campsites, logistics warehouses). These assets are often inaccessible to an individual investor on their own. Thanks to the numerous buildings and tenants, the SCPI has the advantage of pooling rental risks (vacancies, unpaid rent) and provides relative stability in yields. This is especially true for “established” SCPIs, which are industry giants with capitalizations exceeding one billion euros. However, be aware that the investment is not risk-free, and you should not allocate an excessive proportion of your assets to it.
Finally, holding SCPIs has a notable disadvantage: this indirect real estate investment is subject to the property income tax regime, which is based on the investor’s marginal tax bracket. “This scenario is not very serious if the taxpayer has anticipated a significant drop in income and therefore a lower tax rate,” an expert notes.
Selling as a life annuity (viager)
An alternative for retirees who do not have the necessary cash to invest in SCPI shares: the life annuity sale of a primary residence (or even a secondary residence) is a quick and effective solution to provide cash flow when a pension is no longer sufficient. “People start thinking about this solution at 60, but transactions often take place from age 70 and beyond,” says Nicolas Pettex-Muffat, Managing Director of Daniel Féau and Belles Demeures de France.
In this regard, two scenarios are possible. First, there is the occupied life annuity formula. The seller (called the “annuitant”) sells their home but remains there until their departure or death. Upon signing the deed of sale, they receive a lump sum (bouquet) from the buyer (the “annuity payer”) and a monthly annuity paid until their death. In drafting the deed of sale, the notary will have taken care to index this annuity to annual price changes, and thus provided for a 20% to 30% increase in this same annuity in the event the premises are vacated (moving to a retirement home or with relatives, etc.).
Determined based on the market value of the property, these amounts (lump sum and annuity) paid by the buyer take into account the age and gender of the seller. “Be careful, with a life annuity, the senior only has a personal right of use and habitation. This means they cannot rent out their apartment to a third party and collect the rent,” emphasizes Isabelle Itti, a notary at the Cheuvreux firm. “The occupied life annuity provides a significant supplement to income. It allows the elderly person to live peacefully by improving their finances. For example, they will be able to improve the comfort of their home to remain there and/or help their loved ones through donations,” says Reza Nakhai, founder of Viva Viager.
In the same spirit as the life annuity, the bare ownership sale formula is growing. The seller, called the usufructuary, remains on the premises until their death. However, they receive a single payment upon signing the deed of sale. There is no longer an annuity. This solution is mainly offered by institutional buyers who manage funds and purchase many properties from individuals.
