The Ins and Outs of Property as Your Pension
A pension of some sorts is an essential tool for enjoying a comfortable retirement. Planning for your future is more important than ever but there is no rule that says this has to be in the form of a conventional pension scheme.
In fact, in uncertain financial times like we’ve seen in recent years, more and more people have been turning to buy-to-let property as a viable and more reliable alternative.
Buying one home in your life can be a daunting and costly experience (it’s often said that property is the most expensive thing you will ever buy) so buying another one, two or more can have its concerns. However, there are several major advantages of a property portfolio pension.
Firstly, given the recent financial turbulence, pension schemes have been proven to be a little vulnerable. Just imagine working and saving all those years to see it all crumble away on the back of another recession. It has happened.
Secondly, most pension schemes require that the money you save is locked away until you reach a certain age. Even then, when you cash it in, you’re often subject to heavy taxation.
What you need to consider
Given the above, it is easy to see buy to let property as a flexible and potentially very rewarding alternative. However, you need to remember that it does involve more of an initial financial investment. Stamp duty for buy to lets has increased, plus there is the cost of surveyors, estate agents and solicitors. Not to mention the associated costs of upkeep of a property.
You also won’t benefit from employer contributions and the generous tax relief from your own contributions.
Yet even with all that taken care of, property can still outperform a conventional pension. According to Which, if you invested £200,000 in a conventional pension over 35 years and your employer matched those contributions you would be left with £554,763.45. That’s based on 6% fund performance, 2% inflation and charges (these fluctuate over time).
If you put that same £200,000 into property in order to get a similar return the property would need to grow in value by around 2.96% a year – assuming your rental income covers all the costs. According to the Office for National Statistics, in the 35 years between 1981 and 2016 annual growth was on average 6.44%. Far exceeding the required rate to match a scheme.
Of course, those growth rates are not guaranteed and were low in the years between 2006 and 2016. However, historically house prices always rise, and although they may be some slow growth, over a larger period of time you stand likely to do well.
To find out more about the local and national property market, or if you would like to chat about anything to do with property investment, give us a ring on Norwich 01603 567804 or send us a message.
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