Property or pension?

There seem to be many people who love to tell the world their property is their pension, or that buy-to-let is the best investment they have ever made.

Buying property often seems appealing. The expression ‘as safe as houses’ was invented because of it. Dreams of buying a little place by the sea as an investment, watching the price shoot up for a few years and then retiring to live in it seemed to be shared by many.

The reality may be a little more challenging.

The case for property

If you get the figures right, so popular thinking goes, you can buy a home with a buy-to-let mortgage, use the rental income to pay off the mortgage and in 20 or so years’ time enjoy full ownership of a home that has enjoyed huge capital appreciation. 

It may possibly have paid for itself. 

What’s more, that capital growth has been impressive in recent years. Data from the Office for National Statistics shows the average UK house price now stands at £286,000.

But the reality of taking this route is far more complicated than many expect. There is no certainty that property prices will continue to rise, and plenty of indications that they will not.

Despite these indications many people are still entering the buy-to-let market.

It is easy to understand why this might be. Other investments such as the stock market – and hence pension portfolios – are hard to understand and even harder to predict.

The yield on buy-to-let investments also remained positive for several years. But mortgage rates are climbing, cutting into the return from property. Stamp duty, letting fees, capital gains tax and income tax for a higher-rate payers can make it all too easy to lose rather than make money with buy-to-let. 

Stalling house prices and punitive tax changes might make property investing less lucrative over the next 20 years.

The case for a pension

A pension is the other type of long-term investment plan that most people consider. If you are an employee, you will automatically have an employer’s pension of some kind and will be making contributions to it.

Sadly, many employers’ pensions do not really offer the kind of retirement income that most people would want. 

However, a private or personal pension could be an excellent investment. This is primarily because of the tax advantages. Putting a pound in your pension costs just 80p if you are a basic rate taxpayer. That pound will cost just 60p if you are a higher rate payer. This means that a pension is making you money as soon as you pay into it, even before you start looking at the potential growth from shrewd investment and years of compound growth.

A pension could well be the best investment you ever make.

Downsides to investing in pensions? There are caps on the annual and lifetime contributions you can make, so your pension pot has a ceiling – but at £1,073,100 it is a pretty high one. There is also a block on accessing cash before you reach the age of 55.

What should you do?

Investing in property is popular as it is a solid and tangible asset that can be easily understood, and which leaves you in control. A pension is an investment that can be a little harder to understand and may leave your wealth in the hands of a fund manager.

Which route is right for you may depend on your circumstances and the resources you can call on. But it does not have to be a choice of one or the other. A pension, plus a property portfolio could offer you the best of both worlds.

At Continuum we could help you look at the potential of both routes to wealth. Call us today to start your journey.

Your property may be repossessed if you do not keep up repayments on your mortgage

A pension is a long term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Pension income could also be affected by interest rates at the time benefits are taken.

The tax treatment of pensions in general and tax implications of pension withdrawals will be based on individual circumstances, tax legislation and regulation, which are subject to change in the future.

The value of property investments and income from them can go down as well as up and investors may not get back the amount originally invested. 

As property is a specialist sector it can be volatile in adverse market conditions, there could be delays in realising the investment.Property valuation is a matter of judgement by an independent Valuer therefore it is generally a matter of opinion rather than fact.

The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable mortgage products or investment strategy, you should seek independent financial advice before embarking on any course of action.

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