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Is property still a better bet than a pension?

Andy Haldane, the Bank of England’s chief economist, last year confirmed what many of us already knew – investing in property is a better investment for retirement than paying in to a pension.

When answering a question about preparing for retirement, Haldane told the Sunday Times: “It ought to be pension but it’s almost certainly property.”

Haldane, who owns two homes - one in Surrey and a holiday home on the Kent coast - pointed to the fact that there is a chronic housing shortage across the country which continues to place upward pressure on house prices.


“As long as we continue not to build anything like as many houses in this country as we need to ... we will see what we’ve had for the better part of a generation, which is house prices relentlessly heading north.”

Investment returns from residential property - rental income and capital growth – has long trumped all other mainstream investments, including pensions.

But a fresh report published by ThisisMoney suggests that the tide may be turning and that pensions may be a better long-term bet than property after the buy-to-let market was hit by the loss of tax relief as well as wear and tear allowance.

Investing in a pension could now double the returns of bricks and mortars over 20 years as a direct result of the unfavourable tax changes affecting buy-to-let landlords, according to research by online investment company IG.

The study found that investing £200,000 into a buy-to-let property could see your money grow by 237% over two decades once capital gains tax is taken into account.

But a 40% tax payer could see potential returns as high as 435% if they put the £59,700 sum needed for a deposit on that property into a tax efficient self-invested personal pension instead.

The calculations are based on the buy-to-let investor taking out a 75% loan-to-value mortgage and stumping up an initial £59,700 for the 25% deposit and additional purchase costs, including stamp duty, while also factoring in average house price growth of 4.5% a year over the two decades, plus a rental yield of 3.5%. 

The total return after costs factored in for the investment portfolio was lower, with an assumption that the pension pot would generate an annual growth rate of 6% after fees over two decades.

Reflecting on the research, taking into account the phasing out of mortgage interest relief, the portfolio manager at IG, Oliver Smith, said: “There is a stark contrast in the tax treatment of a property versus a pension, with pensions winning out by a clear mile. The recent tax changes on buy-to-let properties will make a huge impact on the potential for long-term returns.

“While these changes are only being fully introduced in 2020, a chill wind is already sweeping through the buy-to-let industry.

“Savers need to remember that every pound spent on purchasing a buy-to-let property is paid out of net income and the tax changes mean that if financing costs rise, landlords will have to shoulder higher costs and consequently receive a lower net of tax income on their properties.”

A separate report from the National Landlord Association (NLA) last week said that the plight of landlords suffering from recent fiscal changes could create the ‘next pension crisis’ as many individuals are becoming over-reliant on property to fund their retirement years.

Richard Lambert, CEO at the NLA, commented: “As a consequence of government policy over recent decades almost two million people are reliant on their property to fund their later years, but the changing tax regime will substantially reduce the income they receive from these investments and so compromise the retirement plans of a significant number of hard-working people.

“Around a quarter [27%] of UK landlords are already retired, and 37 per cent are aged 55 or over, so there is a pressing need to tackle these issues without delay”.

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  • Clynton Nel

    On what basis do they assume a 6% AVERAGE growth of the pension fund over 2 decades AFTER FEES!!! Just so very irresponsible and misleading. Plucking figures out of the air. Tut tut.


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