Pensions versus Property: Which are you banking your retirement on?

Property Investment and Pensions are often talked about in isolation of each other when it comes to retirement planning. Property is often compared against pensions without the consideration of any potential advantages of one investment vehicle benefitting the other.

When it comes to deciding on the right retirement strategy for you, there are many things that need to be considered. Taxation, tax relief, maximum contributions, financial returns, and the way that an asset is dealt with on death can all impact your decisions.

Whilst property has often been considered the better investment option over pensions, recent changes in property law and taxation have meant that there are more costs associated with buy-to-let than before, which has made pensions seem more attractive.

When deciding whether to jump on the ‘Property’ or ‘Pensions’ bandwagon, some investors have gone so far as to withdraw funds from their pension to switch strategy and fund a property purchase (keep an eye out for our follow up article which explains the insanity of doing this from a tax perspective). But it isn’t necessary to make such a finite decision between property and pensions in this way.

A SSAS is a type of pension scheme that allows you to invest into property directly through the pension itself. This little-known pension strategy can save massive amounts of money for investors through the tax advantages it provides. This article explains those in detail.

Tax Advantages And Disadvantages

As a quick comparative overview, any investment returns through a pension fund are free of both income tax and capital gains tax, whereas rental income from buy-to-let property is taxed at the investors marginal rate, and capital gains tax is usually payable from the profit of a property’s sale.

On death, some pension funds can be passed down through generations usually free of inheritance tax (IHT), but IHT would apply to any properties which are passed down as part of the deceased’s estate.

Are You Suited To Property Investment?

There’s also a practical element as well as financial when choosing between property and pensions, in that property investment is much more of a ‘hands-on’ option, which won’t suit every investor. Aside from legal fees, solicitor’s fees and stamp duty costs associated with purchasing a property, there are also ongoing costs (and financial risk) to consider such as void periods (where a rental property remains empty for a period of time), letting agent fees, possible eviction services, property maintenance, gas, electrical and energy performance certificates, and landlord insurance.

Pensions only usually incur a standard plan charge.

The important things to think about when deciding on the best strategy for you is,

• The Net Yield you would be receiving in each case
• The level of risk involved
• The increasingly restrictive rules surrounding buy-to-let
• Whether to ‘cash out’ on a pension to invest in other things, or
• Transfer your pensions into a SSAS where you can invest directly into property

So perhaps the best strategy for retirement, is to really understand how pensions can support property investment and both types of investment can work together to create a super tax-efficient retirement plan that enables you to benefit from a diverse investment portfolio.