We have often heard the phrase, ‘my property is my pension’. People tend to have different plans for retirement. As life expectancy has continually increased for the UK population over the past decades, it follows that the thought of ensuring a decent quality of life post retirement is considered.
The Government introduced mandatory pensions in the form of Auto Enrolment, and this was in part to ensure the populous places a greater onus on saving for retirement. Various factors are important when considering how to fund your retirement and these include risk, tax, cost and return on investment.
These points are considered further below with regards to properties and pensions.
Tax
Tax is always an important consideration in life. Benjamin Franklin’s famous quote, “in this world, nothing is certain except death and taxes” springs to mind.
The table below highlights tax considerations for pensions and property investments (buy to lets).
| Property | Pension |
| Capital Gains Tax (CGT) – this may be payable at 18% or 28% on any gains made when you sell a property | No UK income tax is payable on any dividends or interest from investments made within your pension. Growth is also free from CGT |
| Income tax is payable at your highest rate on any rental profits | 25% of the pension fund can be accessed tax free upon retirement. The remainder is subject to income tax |
| Stamp Duty Land Tax (SDLT) – payable by the purchaser on properties (amount payable depends on property price and whether you already hold title to a property) | Flexibility to choose how to draw down the remainder |
Risk
There is an element of risk in all aspects of life. Nothing is guaranteed. With adequate thought and timely planning, best effort can be made to spread risk.
| Property | Pension |
| Relying only on properties to fund retirement can be risky as you are putting all your eggs in one basket. The housing market can be volatile and tax changes are only a budget away | Value of your pension will depend on the performance of underlying investments. All investments carry an element of risk and you may get back less than you put in |
| No guarantee the property will be profitable by the time you reach retirement | Choice to diversify the funds invested into different sectors which may help spread risk |
| Income can be earned even before retirement on rental profits and this makes it a more liquid investment | Investments are locked away till age 55 at the earliest so one should be sure as to how much they can afford to invest in this way |
Cost
The initial outlay into any purchasing or investment decision ultimately has a bearing on whether the purchase can be made and whether it is affordable.
| Property | Pension |
| Deposits can be high to invest in property, costing many thousands of pounds. It is not thus always feasible to make such investments. | With pensions you do not need much to get started. You can contribute little and often |
| Average house prices in the UK were up 2.5% from the previous year (as at August 2020) | Pension providers charge fees on an ongoing basis and it is important to be aware of these fees. Due diligence is needed to find a provider you are comfortable with as higher fees can ultimately cost you thousands over 20 years |
| Ongoing costs of property agents managing the property |
AJN Advice
We believe adequate advice should always be sought before making such important decisions. AJN are well placed to advise on the aspects of property investments but are not regulated to give advice on pensions. We work closely with IFAs (Independent Financial Advisers) who can advise on pensions.
An ideal mix would be to spread your risk and invest in property alongside pension where possible.
