Pension or Property?

Following the collapse of numerous financial institutions, fewer British people are going to trust the pin-striped risk takers in the City with their financial future.  In fact, half of all British adults of working age do not contribute to any kind of private pension scheme.

It’s widely accepted that the banking crisis was caused by people taking unacceptable risks, which is why a retreat from complex financial products (like some pensions) is likely. Those with defined contribution scheme have seen their pension pots dwindle significantly in recent years, despite making regular contributions. So what will people invest in instead? Even the fall in house prices does not seem to have dampened people’s long term enthusiasm for bricks and mortar. Whether or not it is true, investing in property is so deeply engrained in our national psyche that we want to believe that the housing slump is a “temporary blip” and that, as a crowded island, we will always need more houses.

So should we abandon traditional pensions and invest in property instead?

Expertise and complexity

A house is a house. You do not need a degree in economics to know whether you think it is a good deal or a bad deal. If it’s in your neighbourhood, you probably know what it’s worth, and how much it could be rented out for. Eavesdrop at any dinner party in the UK and you will hear similar conversations being played out.  

On the other hand, how many people around the same table have an understanding and knowledge of complex non-participating rights offerings and securitised packages of mezzanine debt? The financial crisis has compounded a suspicion people feel for financial products they don’t really understand. Being bamboozled with smoke and mirrors tricks with risk and liabilities isn’t sophisticated, it’s dangerous.

Cost

The cost of getting into property investments depends on whether you are a cash buyer, or whether you need a mortgage. If you need a mortgage, you may need to find a substantial deposit to get a decent deal. You may have to service that mortgage yourself if you have a rental void, not to mention mortgage arrangement  fees, surveyors’ and lawyers’ fees. Depending on the value and location of the investment property, you may also be liable for Stamp Duty Land Tax when you purchase it.

These are just the “start-up” costs. Your responsibilities as a landlord may lead to expenditure on repairs and maintenance, not to mention the inconvenience of being at the beck and call of the tenant, or the cost of having to pay a managing agent to do this for you.

The start-up costs to pensions are relatively low, although you will have to pay fund management fees on most products.

Tax

The Government seems to have already weighted our decision in favour of pensions. The tax breaks available mean that an £80 contribution for a basic rate taxpayer is topped up to £100, which over time can seriously add up. For higher rate taxpayers the tax advantage of pensions is even more compelling, as their contributions are topped up by 40%. There are no such incentives in favour of property investment (unless you count the SIPPs rules which apply to syndicates). It’s true that when you come to draw the pension you will be liable for tax, but in certain circumstances if you take a quarter of the fund as a lump sum, and there will be no tax to pay on that portion.

Historic Performance

Of course, both stock markets and property values can go up as well as down. But with pensions you get a broader spread of risk, as your investment is pooled with others and may be spread across various funds. The fund is managed by professionals, who have access to information about the market which can enable them to take calculated risks. With property, even if you are fortunate enough to build up a portfolio, it is only ever likely to be a small one. Your retirement fund will still be tied up in a small handful of assets which will be vulnerable to market fluctuations.

Exit Strategy

Changing your investment in property is simple enough in a decent market. When you’ve found a buyer, you can release the capital that is tied up in the house or flat and spend it there and then, however you please. There is no need to wait until any particular birthday to unlock the value of your investments. However, if the property isn’t your principal place of residence, you may be liable to Capital Gains Tax.

However you decide to provide for your retirement, make sure you take suitable, professional advice about the way forward.

Remember if you transfer your existing pension into a QROPS, then it is possible to purchase property with your pension fund.

Contact us for more information. Fill out the form on the contact Qrops Adviser page or email us direct at info@qropsadviser.com