By Andy Foote, director of SevenCapital
Bricks and mortar have long been a popular investment in comparison to other assets, with the likes of cryptocurrency and gold often lagging behind. But when it comes to choosing between a pension and property investment, it’s a debate that comes with many considerations.
The fact is, it’s becoming increasingly common. The state pension age is slowly but surely climbing towards 70 for the majority of us, while the cost of living is also on an upward trajectory, making retirement seem like a moving goalpost. With the annual amount needed for a ‘moderate’ retirement surpassing the average pension pot by over £40,000, it’s no surprise the pension vs. property debate is becoming more prominent.
So, as many professionals consider the role that property plays in securing a comfortable retirement, what fares better – pension or property? SevenCapital weighs up the benefits and drawbacks of utilising property investment for retirement:
Whether you’re torn between pensions and properties or just exploring up your investment options, tax always has been – and always will be – a significant consideration.
In terms of the pension vs. property debate, regardless of your choice, you’ll likely be facing income tax indefinitely. If your annual rental income or pension surpasses the personal allowance, which currently sits at £12,500, you’ll be required to pay tax on anything above this rate.
While both of these paths are subject to income tax, property arguably has more tax considerations upfront than pensions. Specifically, for those investing in UK property, Stamp Duty Land Tax can add thousands on to your investment. Although the UK is currently on a Stamp Duty holiday until the end of September, when this ends, those choosing property over pensions will need to bear this in mind.
For those with property investment in their sights, Capital Gains Tax could also be a consideration but one that largely depends on your investment plans. If you have a specific holding period in mind to eventually sell your property and draw upon a lump sum as you enter retirement, you’ll be required to pay tax on any capital gains over £12,300.
It’s no secret that property comes with more tax considerations than pensions, but with the competitive returns that property can offer, both on a short- and long-term basis, this often compensates for any taxes and makes it a strong contender against pensions.
Arguably one of the most important considerations when choosing between property and a pension, the returns you can expect from either avenue will ultimately determine the standard of your retirement.
While some pension plans offer attractive interest rates, the opportunities that come with property can make this asset a potentially more lucrative option. As well as being able to sell your Buy-to-Let property and have a lump sum for your retirement, the monthly income you’ll receive can either work towards building a substantial pot for later on, or can provide a monthly income throughout.
Chances are, having a single Buy-to-Let property with a competitive rental yield will provide promising returns for securing a comfortable retirement, but by having a diverse portfolio, not only will the risk of this be reduced but you’ll have a much higher ceiling for building a comfortable retirement.
Diversification can be achieved in many ways, from locations to property types and prices. Growing a portfolio of Buy-to-Let properties in different areas is often a common route, as this gives you the opportunity to benefit from the positive trends across multiple markets, rather than relying on one.
Diversifying by property type or different price points offers similar advantages, allowing you to also reach new demographics of tenants and ultimately, expand your portfolio with multiple passive incomes. Regardless of whether this diversification is achieved through a single avenue or a combination, the benefits of this give you the option to maximise your retirement, which is often absent with pensions.
For the majority of people buying a property, investor or not, mortgages are a key consideration at the beginning of the journey. For those looking to secure a comfortable retirement through property, it’s vital to get the mortgage process right due to the monthly payments you will face.
Much like Stamp Duty Land Tax, those on the pension side of the debate won’t need to think about mortgages. However, prospective investors searching for Buy-to-Let mortgages can choose the best option for their financial goals. Capital repayment and interest-only mortgages are the most common routes for investors but come with considerably different terms.
Capital repayment mortgages are typically larger than their interest-only equivalent, but at the end of the repayment term, you will own the property outright. This means that even though your monthly rental income will likely be consumed by mortgage payments, you’ll have the option to either continue renting when the mortgage term ends and retire with a consistent monthly income or you can sell the property for a lump sum.
On the other hand, interest-only mortgages are usually more common amongst those looking to leverage and scale their property portfolio, with more affordable monthly mortgage payments throughout. While your monthly rental income will likely cover these payments and offer some flexible ‘leftovers’, you won’t own the property outright at the end. Nonetheless, this option gives you the opportunity to utilise month-to-month rental returns and gradually build up a substantial retirement pot over the years.
As we have seen, the property vs. pension debate comes with its considerations, to say the least. With additional taxes to consider for property investment, yet more competitive returns and increased flexibility, it’s understandable that this route often fares well when compared to pensions. However, like with all financial decisions, it’s best to choose what option would be most effective for your long-term plans and goals, with this piece only intended as a guide.