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Property Vs Pensions

David Carter, a Director at Kingston Upon Thames based Rock Financial Consultants sheds some light on whether properties or pensions are the best way to invest.

At Rock, we deal with both clients who prefer to invest via the pension route, as well as many clients who have built up small property portfolios to provide themselves with capital and income in retirement.
With both options, there are a number of pros and cons to be considered and the key to a successful investment plan is to weight these up in accordance with your own personal situation.

Many people still prefer to invest via the pension route because of the tax benefits. A pension is a tax relievable cash investment into a tax efficient fund. It is generally a managed fund which ensures your investment is spread across several market sectors and thereby reducing the risk. You receive relief on the investment and excellent tax breaks making it the perfect environment for growth. Furthermore, when you take the benefits at your selected retirement age (any time between 55 and 75 nowadays), 25% of your fund is available tax free.

On the downside, however, with the remaining 75% of the fund you are only allowed to purchase an annuity – which is an income for life. This means you give up this capital (which could be huge!) to ‘buy’ an income and, worse still, if you die – so does the income.

On the other hand, the buy-to-let investment market provides an alternative way of funding for retirement – one that you can directly influence. The main benefits being that it is much more straightforward and there are substantial profits to be made.

The main disadvantage, however, is the fact that it is much less tax efficient. Not only this, you have to do lots of research into the field, so it is not for the casual investor and, from an investment perspective, the risks are considered to be higher as you are only investing in one market sector (UK residential property).

There is of course an argument for doing both. This way one could utilise their tax free cash from their pension investment to repay the debts on their properties, thereby releasing the income from the properties. Coupled with their annuity this would create a very healthy retirement income. Of course, if the Government had not u-turned on their bill to allow Self Invested Pensions to purchase Buy-to-Let properties into a Pension Plan, we would have had the perfect compromise. One day perhaps ...