Pension vs Property Investment


What to consider when comparing a pension versus property investment for retirement 

With ‘pension freedom’ implemented from 6th April 2015, allowing people to release their pension pots and either reinvest the money or simply take the cash, many are considering investing in property in the hope of better returns.

Although this is possible, there are restrictions. You normally need to be over 55; it can take weeks or months to access the funds and, although this is not widely explained, there are taxes associated with taking money from a pension pot.

Five steps to understanding how much money could be released from a pension

Information about a pension needs to be collated so that options can be properly discussed with an independent financial adviser. The following information is required:

  1. Details of the pension provider(s)
  2. Policy documents, including references
  3. Information about financial retirement plans
  4. An idea of the amount of money needed to be taken from the pension
  5. Some information about the cost of property investment.

Once it has been ascertained how much of the pension pot can be used to invest in property, then it is possible to research what property investment could deliver and compare that to leaving the money in the pension or investing in another form of asset.

How can money be earned from property in retirement?

Property can deliver extra money in two ways: lump sum returns and ongoing income.

A property can be bought at a discount and/or have value added to it, then be sold and the profits either re-invested or kept. Alternatively, a property can be bought and rented out, securing net income from letting to a tenant. If this kind of investment property can also be secured at a discount and/or value added, it can help increase the returns.

In the past, property prices have grown by an average of 5-6% each year, with some years seeing increases of 20-30% or even more. However, since the credit crunch, despite economic recovery and price rises, we have not seen quite that level of growth.

Many property forecasters suggest prices will settle at a lower rate, ranging from 3-5% per year. This means a property worth £150,000 might grow in value to £154,500 next year, and so on. However, this is not by any means guaranteed and prices can go down as well as up.

From a letting perspective, rental income tends to deliver a gross yield of between 5% and 6%. So if a property were bought for £150,000, a 5-6% yield would generate rental income of between £7,500 and £9,000.

Costs then need to be deducted from the rental income, including: mortgage costs, agents fees, safety certificates and any licence fees required to rent, as well as maintenance bills, such as for new boilers and kitchen or bathroom upgrades.

Buy with cash or take out a mortgage?

Some investors consider buying a rental property outright, as they see it as a secure place for their cash and a headline yield of 5-6% from rental income appears to offer a ‘good’ return. This can be helpful when initially purchasing a property to secure a discount.

However, one of the reasons property can deliver better returns than other financial investments over time is because it is one of the few investments you can ‘gear’ i.e. borrow to fund. 

Before finalising any arrangements to invest in property, especially to let it, please speak to one of our specialist buy-to-let mortgage advisers. It is also important to consult an independent financial adviser, to find out whether your plans are viable from a pension perspective.

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