We stack up the figures for investing £7,500 in solar panels against a pension fund.
It seems far-fetched to imagine that putting money into solar panels on the roof of your house could deliver a better return than in a private pension. But that is exactly what the energy minister, Greg Barker, argued in an interview with the Telegraph this week.
Installation costs for solar panels have fallen, and the Government subsidises the electricity they produce, meaning households could get typical rates of return of between 5pc and 8pc, according to official figures.
Average rates on annuities, which many pensioners buy to guarantee a set income for life, are currently around 3.5pc, if the rate of return is linked to inflation.
Financial advisers have been swift to warn that while solar panels have their merits, they are no substitute for a pension in retirement planning.
Laith Khalaf, head of corporate research at Hargreaves Lansdown, said: “There is nothing wrong with the idea of installing solar panels, but it is not a way to save for retirement. Rather, they are something you spend your retirement savings on.”
How solar panels stack up…
Some 500,000 British homes have installed solar panels, which enable users to generate their own electricity and sell any excess power to energy firms.
If a householder spent £7,500 on a 4kWp installation of solar photovoltaic panels to generate electricity, under the current feed-in tariff rates they could generate an income of £770 a year.
The Energy Saving Trust, which provided the figures, said that households could earn £555 a year for generating the electricity, as well as £90 a year selling excess power back to the energy companies. The trust estimated that savings on electricity bills would add another £125 a year.
These figures are calculated on the current tariff rates, which will fall slightly on April 1, so the average 4kWp system could save around £750 a year.
…and how a pension does
A lump sum of £7,500 paid into a pension by a 50-year-old higher rate taxpayer can produce a tax-free lump sum of £5,600 and a pension income of £504 a year when they retire at 60, according to Hargreaves Lansdown.
After income tax at retirement, which is calculated for a basic rate taxpayer at 20pc, this leaves an income of £403 a year.
A key advantage of pension saving is that a pension typically comes with an employer contribution, as well as benefiting from tax relief from the Government, so a lump sum can go much further.
For each £100 a saver puts into a pension, for example, a further £100 will typically be added by your employer and the Government.
Higher rate taxpayers get a further £25 tax back from the Government, turning a saving of £75 into a pension investment of £200.
A pension generates a secure income for life, while the solar panel income will last for 20 years; and the average lifespan of a panel system is 25 years.
If the average male, who has a life expectancy of 86, retired at 60, then the £7,500 lump sum would pay out £16,070 in total over his retirement.
Women on average live slightly longer, with a life expectancy of 89, so they can expect a total of £17,280.
If a pensioner lived until they were 95, which is increasingly common, the initial lump sum would pay out £19,700 over the course of their retirement.
These figures are based on assumptions of 6pc investment growth over the decade before the pensioner retires, and an inflation-linked annuity over the course of their lifetime.
The expected profit for households for solar panels over 25 years is around £10,500, according to the Energy Saving Trust, based on the income and savings after installation and maintenance costs.
The feed-in tariffs for electricity were cut dramatically in March 2012 from 43p to 21p to match the falling costs of installation. Current payments are 14.9p per kWh of electricity generated, and will continue to decline on a three-month basis, according to the Department of Energy and Climate Change.
If a householder who has installed solar panels decides to move house, then they will lose the feed in tariffs and savings – and there is no guarantee they will get a better price for their house to compensate them for their initial investment.
Mr Khalaf said that rather than replacing a pension in a retirement plan, solar panels could be a good use for the tax-free lump sum people can take out of their pension savings.
To extend the tax efficiency even further, people could put the money saved each year on energy bills into an individual savings account (ISA), which will allow the savings to grow each year free of income and capital gains tax.
Dr Tim Sephton, 48, works as a GP for the NHS in Chew Valley, near Bristol. He installed solar panels at his home in 2010 and is considering further renewable energy installations when his family move to a new property later this year.
“In 2010 the solar panels attracted a very good feed-in tariff,” he said. “I paid approximately £11,000 for installation and my income from them last year was about £2,000. We still pay electricity bills but there has been a reduction.”
Dr Sephton lives with his wife, Sandra, 48, and their six children who range from three to 19 years old.
He said a priority at their new property would be to install heat-generating energy measures, but he is considering more solar panels to generate electricity.
“The cost of installation has dropped, but the feed-in tariff has also dropped dramatically,” he said. “It is something we are giving careful consideration to.”
Dr Sephton said: “I do consider it a good investment, but it is completely separate to my pension. It is an artificially created market and I think it is harder to justify today.”
Households should be able to fit solar panels as long as the property roof faces within 90 degrees of south, with no shade from other buildings or trees. However, the performance of solar panels cannot be guaranteed as the amount of solar radiation varies across the country and from year to year.
Ian Cuthbert, a microgeneration expert at the Energy Saving Trust, said: “Costs have fallen significantly over the last year but they do vary between solar companies. We recommend getting quotes from at least three, and householders should only use installers and products certified under the Microgeneration Certification Scheme (MCS).”
Once fitted, solar panels require little maintenance and they should last 25 years or more, although the inverter, which converts the electricity for household use, is likely to need replacing at some point, at an approximate cost of between £800 and £1,000.
It is important that households check any guarantees and warranties provided by the installer – the crucial one is a workmanship warranty that provides a two-year minimum guarantee if the system goes wrong.