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Should I invest in a buy-to-let property or a personal pension?

The debate over whether private pensions or buy-to-let property is best when investing for retirement is as old as time. 

It’s no surprise that Brits have a soft spot for property. It’s not just about the potential financial gain, it’s also about having something tangible that you can have some control over.

Just under half of adults surveyed in the UK believe property to be the best place to invest money, the highest proportion since records began in 2010, according to the most recent Wealth and Assets Survey from the Office for National Statistics. 

If you’ve been struggling to decide whether to invest in property or a pension, this guide will help give you a clearer picture.

Is property still a good investment?

Buy-to-let does exactly what it says on the tin; you purchase property with a view to rent it to tenants. It has been a popular choice for investors looking for regular income, who might hope the value of the property improves over time.

Since the 2008 financial crisis, the government has unleashed an arsenal of initiatives to give first time buyers a leg-up onto the property ladder – including the Help to Buy shared ownership scheme, Right to Buy and the new Lifetime ISA.

However, with decades of chronic undersupply, this artificial boost to the housing market has swung the supply and demand pendulum to the other extreme. With little supply but plenty of demand, the average house price in the UK has risen nearly 50% to £229,000 since 2009, with the average London home nearly doubling in value to £475,000. 

For a first-time buyer on a median income of £29,900, London property can be up to 40 times their annual salary, according to research from the Financial Times. Home ownership is now at 63%, its lowest level since the 1980s. 

With fewer people owning homes, logic suggests these people must be renting. Demand and supply economics means this should push up rental prices. Data from the HomeLet rental index showed that rents in London rose by 1% in May 2019 compared to May 2018, up 1.3% across the UK on average.

Pros of investing in property

  • Familiarity bias
  • Regular income
  • Potential for growth in the property value

Familiarity bias is something many investors are subject to, it is the tendency to invest in something you know. It’s one of the reasons buy-to-let is favoured by many, you can walk past a home, hold the keys, understand what it is to live in it. The physicality of the investment makes it appealing to some.

It’s also easy to understand, an investor buys a property with the view to rent it out. Buy-to-let has also traditionally been viewed as a relatively safe investment. This has been helped by a healthy rental market providing regular income, and a booming property market that has increased the value of the underlying asset (the house).

Investors often look to buy-to-let for stability during times of stock market volatility, low interest rates and/or small dividend yields. The prospect of regular income can also be a welcome addition to a pension. Thanks to rock bottom interest rates, landlords have been attracted to cheaper mortgages and, as long as the housing market remains buoyant, demand is expected to underpin the value of property.

These fundamentals are reflected in the growing number of landlords in the UK, which jumped 7% to 1.8 million in 2013-14, earning £14.2 billion in total, data from HomeLet shows.

Most landlords invest in buy-to-let for the rental income over the potential for long-term capital growth, although this is still a popular motivation.

Cons of investing in property

  • Illiquid investment 
  • A lot of time goes into managing property
  • Beneficiaries may be charged inheritance tax if you pass away
  • Costs to run the property can quickly rack up:
    • Stamp duty when you buy the property
    • Mortgage payments
    • Estate agent fees (for the buying, selling and management of the property)
    • Wear and tear on the property
    • Income tax on the rent you receive
    • Capital gains tax when you sell the property

Property bridges the divide between popular culture and finance like no other asset can, which makes Britain’s affinity with the asset class understandable. But property might not be as safe and stable as many are still happy to believe.

Putting all your risk in one place leaves you exposed to any turn in the market. Instead, diversification can help investors spread their portfolio risk across asset classes and investments, in the hope to smooth out any losses with gains from elsewhere. The government’s crackdown on the market has made it fundamentally tough for investors to make profit and an interest rate rise could cause more pain.

Whilst the buy-to-let market could hold potential, investors need to consider that future rents may not be as high as they were in the past. Added on to this, changes to the tax regime could hit returns.

A buy-to-let investment is not without costs, which need to be managed tightly, and is definitely not for those who like the easy life or are time-poor. Although buy-to-let is for the long-term, this doesn’t mean you can adopt the same “bottom drawer” strategy as a long-term, diversified investment. 

The path to buying the property is a long one; you have to save for your deposit, research the market and know your customer inside out before you even put an offer down on a property. 

Once you’ve bought the property you have to make it habitable before trying to find tenants. Then you have to sort out insurance, which can range from £100-£1,000 – although most are between £200-£300 and can be tax deductible.

Once you’ve got your tenants in, you still have to keep meticulous records to save money on tax, make any improvements and replace things when they break. When your tenants change you’ll have to ensure the property is in a fit state for when more tenants move in. And so the cycle continues.

The illiquidity of property adds even more risk to this cocktail. Many comfort themselves with the notion that they can live in their property if it all goes wrong. Unfortunately, if you already have a home, this just isn’t feasible. Investments aren’t there to have second uses.

 There’s no doubt the last 20 years have been a great time to be invested in property, but are those wanting to join the party now too late? 

Investing in a pension for retirement

Pensions come in many different shapes and sizes, whether from the state or a scheme from your employer. They provide you with a regular income throughout retirement, and allow you to invest your savings for your future income.

A Self Invested Personal Pension (SIPP) is a type of personal pension that offers people more flexibility when saving for retirement. SIPPs are popular with investors looking to reach their retirement dreams, as they give investors more flexibility, transparency and control over their pension investments.

The value of your personal pension depends on how much you put in it, how long you’re invested for, how your investments perform, and how much you’re charged in management fees.

You can invest in a wide range of assets through a SIPP, although not all pension providers will allow you to invest in all asset classes through their platform. This list of asset classes includes:

  • Stocks and Shares
  • Exchange‐Traded Funds
  • Investment Trusts
  • Funds
  • Bonds
  • Bank Deposit Accounts
  • Commercial Property
  • Real Estate
  • Offshore Funds

Pros of investing in a personal pension

  • Tax relief relative to your income tax band 
  • Your pension can grow tax-free within your pension wrapper 
  • Investing your pension can offset the impact of inflation and grow your savings for your retirement income
  • You can choose how much control you have over your pensions, opting to manage your pension yourself with a DIY platform, or let the experts do it for you with a digital wealth manager, whilst still keeping you in control with easy access to your pension hub 
  • You can take 25% of your pension savings tax free from the age of 55
  • Pensions can be passed on to beneficiaries with no inheritance tax charge if you pass away before 75
  • You can combine all your old pensions into one pot, which can be easier to manage and cheaper to run

The government wants you to save for your future, that’s why there are a number of tax incentives available to those who invest in a pension. You may be eligible for tax benefits when you contribute to a pension, whilst your money is invested and when you retire.

The government gives you tax relief on your pension contributions relative to your income tax band. Basic rate taxpayers get 20% tax relief, higher rate taxpayers get 40%, and additional rate taxpayers get 45% tax relief on their pension contributions. 

For example, if you’re charged the basic tax rate, you’ll only need to pay £8,000 into your pension for a £10,000 contribution – the basic rate tax relief is automatically added to your pension investments. This tax incentive is a real draw to saving for your future, as it essentially gives your savings a 25% boost.

If you’re a higher rate or additional rate taxpayer, you can claim back even more through your annual tax return. This is equivalent to a higher rate taxpayer paying £6,000 for a £10,000 contribution and an additional rate taxpayer paying just £5,500 – although the additional relief is reflected in your tax band and isn’t processed like your basic rate tax relief. This tax relief scheme can make a real difference to the amount you save for your retirement income over the long-run.

In Scotland the tax relief scheme differs slightly, after two additional bands were added; a ‘starter’ of 19% on income between £12,500 and £14,549, and ‘intermediate’ of 21% on income between £24,944 and £43,430. The higher and top rate have risen by 1% to 41% and 46%. Those on starter rates will still get 20% tax relief at source.

Cons of investing in a personal pension

  • You may lose your employer contributions if you don’t make the most of your current employer pension scheme
  • The value of your pension may fall due to the dynamics of the market
  • You can’t access our pension until you are at least 55 (although we actually believe this to be a good thing)
  • Pension fees can be expensive and you could find yourself paying more than you need to if you don’t look for the best value for money

Investing your money for your future can be daunting. It takes a lot of time, skill and knowledge to give your money the best chance to grow, especially when it’s for something as important as your retirement income. 

You need to ensure you’re investing in the right way to get you where you need to be within your desired time horizon. Understanding your investor profile is one of the first steps to doing this. 

Your investor profile acts a bit like your investor DNA, outlining the foundations of what you should invest in and the proportion that each asset class should make up in your portfolio. Your portfolio should then be managed and adjusted to continually reflect your investor profile for as long as you invest.

If you want to invest by yourself, you’ll need to be able to objectively analyse your personality, financial background, appetite for risk and time horizon, and build a diversified investment portfolio to reflect this. 

You can now access digital advice at the touch of a button and at a fraction of the price of the traditional industry thanks to innovation in financial services. We believe digital advice helps people make better decisions with their money, therefore helping them lead a better life

Managing your money for your retirement is now cost-efficient, simple, and hassle-free, allowing you to focus on the important things in life. 

Where should I invest my money?

A pension is a simple and tax-efficient way to maximise your savings for your retirement income. If you don’t have the time, confidence, or skill to manage your pension investments yourself, opening a pension with a digital wealth manager like Moneyfarm can help you make better decisions with your investments. 

Moneyfarm blends digital advice and human investment guidance on its fully-managed pension portfolios, putting its customers in the best position to reach their financial goals. The Investment Team build and manage the portfolios to ensure investors are in the best position to reach their retirement goals. 

If you’re unsure how to meet your financial goals, it’s wise to seek financial advice.

Moneyfarm’s team of  Investment Consultants will support you in the way that best suits you – whether that’s in person, on the phone, or over email. Whether you want investment guidance, retirement planning or market insight, please book a call and one of our Investment Consultants will be in touch to answer any questions you might have.

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