Pensions vs Property: what is the best retirement investment?
Is buy-to-let worth it as an alternative to pension saving? It is a question more people are asking, especially as:
- Final salary schemes have all but disappeared – no more guaranteed income
- Statutory retirement age is being raised – you’ve got to work for longer
- Annuity rates have collapsed – personal pension plans buy low income now
- Workplace pensions receive just 5% of the funding that final salary schemes receive
If you’re concerned that you won’t have enough money in retirement, you’re not alone. Research conducted by Aviva in 2016 found that:
- 60% of adults are concerned they won’t have enough savings to last them through retirement
- 70% of 25 to 34-year-olds are worried about their retirement finances
In this article, we’ll discuss pension plans and how they could implode and leave you with nothing. We’ll also examine a few of the huge benefits of buy-to-let property investment for retirement income.
What is a pension plan?
Pension saving in the UK comes in two basic varieties: a workplace pension and a personal pension. Both work in a similar way: your money is invested, with the hopes that it will grow until you retire. When you retire, your pension fund is used to buy an income-producing product. It is usually an annuity.
There are some nice benefits of investing in a pension scheme. The main ones are:
· You get tax relief on your contributions
This tax relief is calculated by reference to your income tax rate. If you pay tax at the basic rate (20%), for every £80 you invest, the government put in £20. A higher rate taxpayer (40%) who pays in £6,000 will benefit from £4,000 added by the government.
· Your fund grows (almost) tax-free
Any capital growth and most of the income in your fund is tax-free.
· Your employer may make contributions
If you’re saving via a workplace pension scheme, your employer could make contributions for you, too. That’s, even more, bang for your buck.
What are the pension plan pitfalls you won’t be told by a financial advisor?
While that tax relief and tax-free growth sound appealing, there are a few pitfalls and disadvantages that your financial advisor will be reluctant to tell you about. These include:
· You can’t access your funds early
You can forget about retiring early. While most schemes allow you to take a pension at 55 years of age, many now stipulate 60. With an ageing population, there is a possibility that this age will be raised further by the government. And if you need to access your funds early? You can forget it unless you want to pay up to 55% tax on your withdrawal.
· Your fund manager might underperform
Your pension fund will be professionally managed. But did you know that 80% of professionally managed funds underperform their benchmark? You could find you have a pension fund with way less in it than you anticipated.
· Your pension funds are limited
You can only save up to £40,000 a year in a pension. Okay, most of us wouldn’t be able to put this amount in, so this may seem a moot point. However, your total fund is also limited. Your pension fund cannot be more than £1 million. It means your income in retirement is limited, too.
If your pension fund is £1 million at retirement, and you used the whole amount to buy income from an annuity, you’ll have an income of around £45,000. No chance of more.
· When you buy an annuity, your savings are gone
The main way of creating an income from a pension plan is to buy an annuity. Once you do so, your funds have gone. If you die, your spouse may get a pension. When they die, there is nothing left to bequeath your loved ones.
Let’s say you have saved £1 million in your fund. You retire at 65 and take £45,000 income. At the age of 70, both you and your spouse pass away. Over five years, that £1 million has bought you a total of £225,000 income. But, the annuity provider keeps the remainder of your fund, leaving nothing left to pass on to your estate.
· Company pension schemes can go bang!
If you are lucky enough to have a company pension scheme that promises stellar income in retirement, don’t count on it. The pensions landscape is littered with pension scandals that have cost retirees hundreds of billions.
Worried about pensions? Invest in property
You may not be able to claim tax relief on residential property investment, but you can invest with the benefits of leveraging in property investment. You get to use other people’s money to invest and keep the net growth or income. The benefits of investing for retirement using residential property include:
· Profit from other people’s money
Put £40,000 into a pension fund, and the government will add £10,000. Use that £40,000 as a deposit on a buy-to-let investment property instead, and invest with a 75% buy-to-let mortgage. You get to keep the income and capital growth on the entire £160,000 investment. Every year. All the way through to retirement and beyond.
· Steady (and growing) income
Rents tend to rise over time. Every year you own your buy-to-let property, you’ll be able to review the rent. Over time, your net rental income will grow.
When you retire, you’ll benefit from a steadily rising income which protects you against inflation.
· Access your retirement income when you want
There’s no minimum age to retire when you invest in property. You could retire, or semi-retire, years before a personal pension plan would be available to you. And if you need to sell a property to pay for your child’s degree education, or a wedding, and so on, there’s no problem.
· Your children benefit from your investment, forever
Unlike annuities, your property doesn’t disappear when you die. It’s a real, tangible legacy to leave your loved ones. So that they can benefit from the income your property investments produce.
Increasing numbers of people are investing in property to create stunning retirement income. You could join them. Contact one of our team today on +44 (0)207 923 6100, and start the discussion. It’s never too early, or too late, to invest in buy-to-let property as a pension. We’ll help you define your goals, plan your strategy, and benefit from all the advantages of buy-to-let property investment for retirement income.
Live with passion