After witnessing skyrocketing growth in the UK property market over the past few decades, many people are turning to property to fund their retirement over the more traditional method of pension plans.
When comparing property investment and pensions as retirement plans, both strategies have various advantages and disadvantages. This uncertainty can make choosing between them a minefield, which is especially anxiety-inducing when it is your financial future at stake.
Pension plans are the most common way to save for retirement. In the UK, there are three main types of pension: state pension, workplace pension, and personal pension. All eligible people will receive a state pension, but most will top this up with one of the other two pension types. Those who have a workplace pension will benefit from employer contributions, but those with a personal pension (often self-employed people) will not.
Property investment involves acquiring property and accruing income through rent and/or capital growth. In the context of retirement, some may use rental income to fund their lifestyle after retirement or sell up and live off the returns made through the property’s appreciation in value over the years. Why not learn more about Property Investment with RWinvest a UK based property specialist.
The UK property market has displayed massive amounts of growth in the past few decades. Significant returns can be made when selling property 20 or 30 years after purchase, and this big payout is a major reason why many are looking at property investment as a lucrative retirement plan.
On the other side, most pensions do grow in value, and you are very unlikely to lose money by investing in a pension pot. However, any gains made will probably not be as significant. If you’re looking for a big return on your investment, then property is the way to go.
Although all investments come with risk, pensions are a famously safe way to accumulate funds for your retirement. Pensions are usually protected by an independent financial regulator, so if any issues occur with your employer or pension provider and they cannot pay out, your pension will remain intact, or you can be compensated up to the full value of your pension pot.
Typically, property is a higher-risk investment than a pension plan. The UK property market has exhibited relatively stable growth so far this year, but it remains true that markets can be unpredictable, and growth relies on a number of factors such as demand, interest rates and the wider economic climate.
One way to lessen the higher risk associated with property investment is to invest in multiple assets and put just part of your pension into property.
Compared to a pension plan, property has the potential for big returns, but these returns can only be gained after fronting the initial high costs that property investment demands.
There are some ways to minimise this initial cost, such as investing in an off-plan property or finding a property with a lower sale price than average. But overall, you will need a large amount of capital to begin investing in property. There are also many other costs to take into account, such as taxes, insurance, maintenance and repairs, which means there is a high financial barrier to getting started in property investment.
On the other hand, pensions do not require a high budget and are more flexible in this respect.
When it comes to property investment, there is a range of taxes to be aware of, such as capital gains tax, income tax, and stamp duty tax. There isn’t as much offered in tax relief to UK property investors as in previous years, but there is still some available depending on the situation, so it is worth looking in detail at what kind of relief you would theoretically be entitled to.
One of the main advantages of a pension plan is generous tax relief. Unlike money invested in property, pension contributions are protected from income tax and capital gains tax.
A big benefit of property investment, when sized up against a pension plan, is the ability to collect earnings before you retire in the form of rental income. This money can be saved for retirement or accessed right away. There are companies such as Britania Estate Agents and Rightmove that highlight a huge amount of buy to let and other properties available for investment opportunities.
When it comes to a pension, any money you gain usually can’t be accessed until you reach a certain pre-agreed age (usually 55). If you are enrolled in a pension plan that invests in stocks and shares, it is possible to earn regular dividends, but these payments tend to be lower and not as stable as rental income.
Of course, this article doesn’t provide an in-depth look at every situation. Either strategy is a viable way to prepare for retirement, but depending on the type of pension plan or property investment you choose, there are many different variables to take into account.
However, it can be said that, in general, property can offer a much higher return on investment if you are willing to accept the higher risk. Conversely, pensions offer a more secure retirement plan but usually without major growth on your investment.
