Are solar panels a good investment?
Energy minister Greg Barker caused a storm when he suggested people would be better off installing solar panels on their roofs than investing in a pension.
The argument went like this. Save hundreds of pounds a year while helping the environment and the government will also reward your green credentials by paying you for the electricity you generate. Over the long term, you could secure a return on your investment that beats some pension options.
While that was an overly simplistic comparison, the merits of solar power have certainly caught on. The Department of Energy and Climate Change says there are now more than 500,000 solar panel systems installed across the country.
If you're considering installing solar panels on your roof, here's a quick guide to everything you need to think about.
Is my home suitable?
To get the optimum performance – generate the most electricity – from a solar system, your roof should ideally be south facing and pitched at an angle of around 30 degrees. The panels will still work if your roof faces another direction and can be fitted to flat roofs with a frame but the power generated from the panels will be less.
While there's no need to worry about the gloomy UK weather as panels still generate significant amounts of power even on cloudy days, you do also need to consider whether there are any obstacles that could get in the way of light reaching the panels – such as trees, or maybe next door's extension.
And the more space you have for the panels to be fitted to, the better. So while your shed or extension might be in a more southerly direction, chances are your roof will be a better home for the panels.
How much does it cost?
Microgeneration expert at the Energy Saving Trust Ian Cuthbert says the cost of installing a solar unit has fallen significantly in recent years, with most people looking at a cost of between £6,000 and £9,000.
"The installation cost is going down, with systems generally around half the price they were one to two years ago, and people are installing bigger systems, with the average size going up from 3 to 4kWp in the space of a year," he says.
Some suppliers will even install the panels for free but the drawback to this is that you won't get the government's feed-in-tariff, which pays out for every unit of electricity the panels generate. Instead, the installation company will take it, meaning you'll just save on your energy bills.
Once installed, the panels will require little maintenance but need to be kept clean and free from any debris from nearby trees. The panels should last 25 years or more but the inverter – which links your roof to your domestic supply – is likely to need replacing at some point and will set you back around £800 currently. So it's wise to consult with the installer about guarantees and warranties before you take the plunge.
On top of cutting your carbon footprint and reducing the amount of electricity you need to buy from an energy company, the government will pay you for the amount you generate through the feed-in tariff. This was introduced in 2010 as an incentive for people to install renewable energy technologies in their home. Plus you can sell any electricity you don't use back to the National Grid.
What you'll earn
If you had already installed panels before 31 March 2014, you will be guaranteed a rate of 14.9p per kWh for the next 20 years. And every kWh your system generates that you don't use in your home will earn you 4.64p, meaning a typical home with a 4kWp system could make a combined saving of around £770 a year, according to the trust.
However from 1 April 2014, the feed-in tariff fell to 14.38p, so the amount you could potentially make will be reduced to around £750 a year. It's worth remembering that the tariff is reviewed on a quarterly basis and has been dropping ever since it was introduced as more homes install systems. So if you are certain you want to take the plunge, then it's best to act quickly.
And don't forget whatever electricity you do use, the less you will need from your energy provider, cutting down the amount you have to spend on your electricity bills. Comparison site uSwitch says the average annual saving is around £200 a year.
When highlighting the benefits of solar power, energy minister Greg Barker used the example of annuity rates as a comparison. A typical annuity – which guarantees you an income for life in return for trading in your pension – currently pays out around £6,000 a year for every £100,000 of pension savings. With the government claiming panels return between 5% and 8% a year, that sounds like it could beat the 6% annuity rate.
Is a solar panel really better than a pension?
However, the comparison isn't quite as straightforward as that.
Andrew Tully, pensions expert at MGM Advantage, says any fair comparison between pensions and panels is difficult to achieve and that the benefits of a pension shouldn't be underestimated. After all, an annuity guarantees a fixed income for the rest of your life. And there are plenty of other advantages to pensions.
"There is no tax-relief (with solar panels) whereas a payment into a pension would get 20% tax relief, or more if you are a higher-rate taxpayer," he explains. "Your employer obviously won't contribute towards solar panels whereas many will make some form of payment to your pension scheme, plus your pension comes with the bonus of a 25% tax-free lump sum when you take benefits, and potential payments to dependants if you die."
In a nutshell, solar investment should be viewed as a potentially complementary investment to a pension - not a substitute.
Should I install solar panels?
If you are looking for a way to cut down on your energy bills, getting panels installed for free could work well. You won't be able to take advantage of the feed-in-tariff but you will make savings.
If you want to make money out of your panels too, then you'd be better off paying for them but remember it will be several years at the very least before you see a return on your investment.
One final point to consider if you do decide to pay for them is that your 20-year feed-in tariff is linked to the panels being installed on your property so if you move you won't be able to take your investment with you.
Tax-free lump sum
An inelegant phrase that is nonetheless accurate in what it describes: a one-off payment to a beneficiary that is free of any form of taxation. Usually received when using a pension fund to purchase an annuity, as 25% of the overall fund can be taken as a tax-free lump sum.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.