Property or Pension?

Property or pension? This is a question I am frequently asked and one which is given a significant amount of coverage in the financial press. I often hear people boasting that their property is their pension, or that their buy-to-let is the best investment they have ever made. The image of a little place by the sea as an investment before retiring to live in it can be a strong pull for many people.

So, can property replace the need for a pension? The short answer – it depends!

I believe the starting point is to view this in the context of the bigger picture, and to avoid the temptation of just looking at the numbers. By this I mean firstly understanding what the priorities are, what is really important, what resources are available both now, and in the future and whether owning a second property is aligned with all of this and the vison for the future. Everything should flow down from this and also because the reality of investing in property is far more complicated than many expect.

At a more tactical level how does property ownership and pensions compare? Firstly, I believe that for a lot of people property is much easier to understand and for a start it is a tangible asset with a structural presence which gives peace of mind. By comparison, the benefits of investing into a pension are harder to grasp and it takes longer for this to have an impact.

As with investing in a pension, there is no certainty that property prices will rise, and tax reliefs are far less generous than with pensions. However, investing in property has been a relatively stable long-term investment, with the exception of 2008 and 2009 when the world was gripped by the financial crisis.

And although the performance of a low cost, globally diversified investment inside a pension is likely to far outstrip a property investment over the long-term, people perhaps do not see that and only benefit from it when they access their pot. Furthermore, with a pension investment there will be downturns which can often mean accepting lower returns over some periods, and a need for patience with the resulting challenge to stick the course. A rental in Chelmsford may seem to many a safer bet as an alternative income source!

Also, there is a tax sting. Most owners will pay the additional rate of stamp duty, which is the normal rate plus 3%. If owned directly rather than via a company structure tax is paid on rental profits (less allowable expenses) – at 20%, 40% or 45%, depending on the personal tax position. Furthermore, mortgage interest relief is now only given as a tax reducer at the basic rate of 20%. Capital gains tax will also be due at 18% or 28% again depending on an individual’s personal tax position.

Buying and maintaining a second property is not always an easy ride. There is the consideration of the potential hassle of being a landlord, which might not be compatible with any desire to wind down. Also, for those who are not lucky enough to purchase in cash there is the potential issue of borrowing which may feel uncomfortable to some, especially if the residential mortgage is about to be or has just been paid off.

In conclusion, a property investment can fit in alongside a pension although I would caution against being overweight in property with a resulting lack of diversification. Property prices do not go up in a straight line and they don’t always rise.

Being mindful of the bigger picture there is a risk that if the sole driver is to just make money this may reduce the ability to do other things, depleting resources that might otherwise be available. This may increase stress levels and diminish the ability to focus on what is important. In my view it is better to use resources which contribute to the quality of life and owning an investment property may or may not fit in with that.