Property vs pension: which is the better investment?

May 24, 2018

 

With the UK population living longer than ever, the ways in which you invest for retirement can have life-changing consequences. 

 

Property has long been seen as a sound investment. But with house prices stagnating and an increasingly punitive buy-to-let landscape, can it still beat a pension for long-term growth? Here, we explore the pros and cons of both pension and property investment to help you decide what’s best for you.

 

Investing in buy-to-let property

 

Property values have skyrocketed in recent decades, prompting many investors to build expansive property portfolios now worth hundreds of thousands, or even millions, of pounds. But is investing in property still a good bet? Headlines have recently warned that the bubble has burst in some regions – for example, the latest LSL Acadata house price index, released on Monday, showed a 2.5% year-on-year drop for London house prices. Other areas, however, are continuing to see growth, with Wales experiencing annual house price growth of 4.8% in the year to May.

 

It’s not uncommon for the market to experience blips as supply, demand and the mortgage-lending landscape adjust themselves. For this reason, it’s important to see property as a long-term investment.

 

Is buy-to-let losing its appeal?

 

There have been a raft of changes for buy-to-let landlords in recent months, arguably making property investment less attractive than it once was. Mortgage interest tax relief has dropped to 50% and will be cut to zero in 2020, with landlords instead given a 20% tax credit on their mortgage interest; mortgage-lending criteria are tightening; some councils have introduced mandatory landlord licensing; and buy-to-let properties now need a minimum EPC rating of E.

 

Investors have also had to pay an extra 3% in buy-to-let stamp duty since 2016, and higher and additional-rate taxpayers are charged 28% in capital gains tax on property, compared with 20% on other assets. Landlord responsibilities can also be time consuming. Even if you use a managing agent, you’ll need to factor in the danger of problem tenants, periods when the property is empty, running costs, insurance and property maintenance. Despite these challenges, property investment can be profitable in the right circumstances. In fact, recent research predicted that someone investing in a buy-to-let property now stands to make an average £265,000 in capital gains and rental income over a 25-year period.

 

Nutshell summary: pros and cons of property investment

 

Pros

 

Property values have shown phenomenal growth in recent decades. The average house price in February 2018 was £225,047, up from £57,726 in April 1990, according to the Land Registry.

 

The combination of rental yields and capital growth means you have both immediate income and the potential for long-term profit.

 

You can sell the property at any point and invest the money in other ways.

 

Cons

 

Buying, maintaining and selling property takes more time than contributing to a pension.

 

If you have a mortgage, you run the risk of being left in negative equity if house prices fall.

 

Tax changes have made property investment less financially rewarding than it once was.

 

Mortgage providers are tightening their lending criteria.

 

Property counts towards your estate and is therefore subject to inheritance tax.

 

David Blake, principal adviser at Which? Mortgage Advisers, says: ‘Over the years, property has generally been a sound investment for most people. ‘That said, we are now entering a period of economic uncertainty with no definitive timescale. Property should generally be treated of as a longer-term investment and, like any investment, there are no guarantees of a return.’

 

Should you see your own home as your ‘pension’?

 

Some people choose not to put money into a pension, instead saying that ‘their house is their pension’. But treating your own home as your retirement gravy train can be problematic – after all, you’ll always need somewhere to live.

 

The most obvious course of action if you don’t have a large pension but have built up significant equity in your home (or paid off your mortgage entirely) is to downsize upon retiring.

 

However, if you’ve lived in the same house for a long time it can be an emotional wrench to leave, and many people are surprised by how difficult they find it adjusting to life in a smaller property.

 

Moving house also carries significant costs – not least stamp duty, which can run into thousands of pounds.

 

Equity release – where you borrow money against your home while still living in it – is your other option if you have a property but only a small pension. This is an expensive option, though, and will usually make a significant dent in your descendants’ inheritance, so seek independent financial advice before releasing cash in this way.

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