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InFocus

Property or pension?

Considering the benefits and drawbacks of both approaches can help vets make informed decisions on the best course

When it comes to saving money for one’s future, the number of people who prefer property investments to pensions is on the rise, despite the government tightening the tax burden on buy-to-let landlords.

Investment growth

It has been well publicised that property has experienced some extraordinary levels of capital growth over the years. UK house prices have far outstripped inflation – the general rise of prices – by some 3 percent a year since 1955. But the UK stock market has grown faster still, gaining investors on average over 6 percent above inflation over the same time period. These figures were calculated by Numis and London Business School; they exclude rental and dividend yields and don’t factor in the costs of investing in each.

Rental income or dividends?

With buy-to-let property, you get the combined benefits of ongoing rental yields alongside inherent appreciation in value. With the average UK rental yield around 3.6 percent, this gives you a regular income with the prospect of additional profit in the future. By contrast, the FTSE All-Share currently offers a prospective dividend yield of 4.7 percent (variable, and not a reliable indicator of future income).

Of course, both yields are averages. Properties in certain parts of the UK are likely to generate a much higher yield, just like certain businesses that are listed on the stock market can offer higher dividend yields than others. Often higher risks accompany higher rental or dividend yields so one needs to be mindful of this when considering investment.

Inheritance tax benefits

Property counts towards your estate, which means it will normally be subject to inheritance tax. A pension, however, can be claimed tax-free by your beneficiaries if you die before the age of 75. If you’re older than 75 when you die, your pension still isn’t usually subject to inheritance tax, but your beneficiaries would pay income tax at their marginal rate.

Time is money

You’re free to sell your property whenever you like, with the option of investing that money somewhere else. You might have to pay 18 percent or 28 percent in capital gains tax on any increase in the value of the property. Once your money is inside a pension, however, you can’t usually access it until the age of 55 (57 from 2028). At this point, you can usually take up to 25 percent tax free and the rest you’re free to take how you like, but it will be taxed as income.

Property investment can be time consuming and often requires a lot of effort. Finding tenants, handling the bad ones, dealing with letting agents and arranging (re)mortgages, tax returns, maintenance, repairs, decoration and insurance are all aspects that will need to be considered. Buying and selling is costly and can be drawn-out. In some ways, if you have more than one property, it can be like running your own small business.

A pension on the other hand is a comparatively relaxed affair. It should be the first thing most people consider for their retirement saving. Every UK resident under the age of 75 is able to invest, even children and other non-taxpayers, and when you add money, you get a boost from the government of up to 45 percent. It’s one of the most generous tax perks available and the main reason why so many people put money in a pension in the first place.

Remember, tax rules can change and benefits depend on personal circumstances. Unfortunately, most traditional pensions don’t give you the flexibility to invest where you want to. And it’s not always easy to see or understand what’s happening with your money. This is why it can often be useful to seek guidance from a finance professional to help you make a financial plan that meets your specific needs, objectives and tolerances for investment risk.

Certain types of pension, like a SIPP (self-invested personal pension), let you (or your appointed adviser) choose all your own investments from a large selection. This can even include commercial property, so there is a way of combining the two investment approaches in one!

The risks

With the freedom and flexibility of a pension/SIPP also comes responsibility. You’ll need to be comfortable with your investment decisions and the risks these entail.

There’s always risk with investing – the value of your investments can go down as well as up, so you could get back less than you put in. This means a pension/SIPP might not be right for everyone.

Just like the stock market, the value of property can fluctuate. If you buy property with a mortgage, you are at risk of finding yourself in negative equity if house prices fall.

You can also face void periods should you be unable to find a suitable tenant. Or worse still, if a tenant defaults on the rental income, it can take a considerable time to evict them, during which time you may receive no income but still have liabilities such as the mortgage interest.

Another major consideration is the additional 3 percent stamp duty that now applies to investment properties. Tax benefits on property also aren’t as generous or rewarding as they once were, and mortgage providers are introducing stricter criteria before lending.

Conclusion

When it comes to property and pensions, it’s not necessarily a case of one being better than the other. Both have their advantages and disadvantages, and what’s right for you will depend on how comfortable you are with the risks of each. Investing is all about allocating your money in order to benefit from a decent return at some point in the future, and there’s no reason property and pensions can’t complement each other as part of a diverse investment portfolio.

Rob Tiffin

Rob Tiffin, AwPETR DipFA, joined RT Financial Planners in 2010. Rob is qualified to diploma level and advises on specialist pension transfers. He works with businesses and individuals, in the main advising on pension and investment matters.


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