Property Vs Pensions Property Vs Pensions

Using a Pension or Property for Retirement: Which is the Better Investment?

Property investment is a venture that’s growing in popularity around the world, with more and more people from all walks of life considering maximising their income with the help of buy to let. More recently, there’s been a noticeable rise in the number of people that are considering using their retirement funds to purchase a buy to let property. Data shows that almost £2.4 billion has been taken from peoples pension funds to pay for a buy to let property, while a YouGov poll also revealed that 30% of respondents aged 45 to 54 were considering using their retirement funds to invest in property.

If you’re approaching retirement and beginning to get serious about your pension savings, you may be wondering whether to opt for a buy to let property or pension for retirement, or using their pension funds to buy property. There are many reasons why some people are unsure whether to opt for a property or pension, such as the desire to maximise their retirement funds and own a valuable asset rather than just saving their income. There are pros and cons to both the pension vs property strategy for retirement purposes, and whether you want to use a property or pension is completely down to your own goals and individual circumstances.

If you’re currently wondering whether buying property with a pension fund is a good idea, or whether a pension vs property is the best way to go when saving for retirement, take a look at this detailed guide. Here, we cover everything you should know before deciding on a pension or property investment, and offer information on using your pension­­ to buy property for an investment. If you want to find out more, scroll down to read our guide to using a pension or property for retirement.

 

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Property or Pension: Investing in Property

Investing in property is one of the most popular methods people consider when it comes to saving large amounts of money. If you’re not too familiar with property investment, the term basically means to purchase a property and generate income thanks to rental returns or capital growth – or a combination of the two. If you choose to purchase a buy-to-let property, you’ll usually do so with the help of a buy to let mortgage or by paying in cash instalments if you can meet the costs required.

The reason why many people consider buy to let when choosing between pension or property for retirement is because of the potential to make huge returns. Bricks and mortar are also viewed as less risky than pensions due to certain pension schemes being subject to scandals over recent years. However, for many, deciding between a pension or property investment strategy is tough.

While there are some benefits of investing in property compared to a traditional pension, if you’re considering getting into property investment as a pension alternative, you should seek professional advice to work out which is the best decision for you. In the meantime, here are some of the benefits and downsides to investing in property for you to weigh up in regards to using a pension vs property for retirement.

  • By investing in property, you will have ownership of a physical asset that you can hold on to for as long as you like.
  • You can generate regular rental returns which you can either use straight away to boost your monthly income or add into a savings account.
  • If the property market grows in value by the time you come to sell, you can make significant capital growth returns.
  • You will need to pay certain taxes to purchase and maintain your buy to let investment.
  • If you don’t invest in UK property hotspot areas, your property could fall in value which could negatively affect your investment.
  • Unless you use a property management company, staying on top of your buy to let investment can be time-consuming.

Pros of Property Investment for Retirement

  • By investing in property, you will have ownership of a physical asset that you can hold on to for as long as you like.
  • You can generate regular rental returns which you can either use straight away to boost your monthly income or add into a savings account.
  • If the property market grows in value by the time you come to sell, you can make significant capital growth returns.

Cons of Property Investment for Retirement

  • You will need to pay certain taxes to purchase and maintain your buy to let investment.
  • If you don’t invest in UK property hotspot areas, your property could fall in value which could negatively affect your investment.
  • Unless you use a property management company, staying on top of your buy to let investment can be time-consuming.

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Pension Vs Property: Investing in a Pension

Putting money into a pension is well-known as the most popular method of saving for retirement. There are three main types of pension in the UK – an employer’s pension, a state pension, and a self invested personal pension (SIPP). For a lot of people who are enrolled in an employer’s workplace pension, investing money into a pension scheme is something that happens instantly, with funds regularly leaving their account each month. Similarly, a state pension is a retirement fund offered by the government. However, SIPP’s work differently, and are viewed as more of an investment, similar to stocks, since the participant chooses which funds their money is invested in, with varying levels of risk.

For some further insight on whether you should buy property or pension funds as a way to save money for retirement, here are some of the pros and cons of investing in a pension.

 

Pros of a Pension

  • If you enrol in a workplace pension, you can benefit from employer contributions on top of your own savings.
  • Pensions are very tax-efficient, allowing you to benefit from pension tax relief.
  • Depending on the level of risk you accept, you’re unlikely to end up with less money than you put into your pension.
  • You can choose from a variety of different pension plans.

 

Cons of a Pension

  • Depending on the amount you put in and the level of risk you’re willing to take, your pension may not grow as much as you need it to for a comfortable retirement.
  • The government may change the rules of your pension at any point.
  • Your money is locked away until you turn 55, after which time you can only withdraw 25% or you face an income tax charge.
  • If you choose a workplace pension, you don’t have control over where your money is invested.

Commonly Asked Questions About Using a Pension vs Property For Retirement

Some people consider the property they live in themselves to be part of their pension. While property is certainly an appreciating asset, especially if the home you purchase is based in a high-growth area, you’re relying on significant long-term growth in order to make enough money to live on for your retirement. Not to mention the fact that you may not wish to sell your home by the time you retire.

When people are thinking of whether to invest in property or pension funds for their retirement, they’re usually contemplating buy to let or pension investments rather than a residential home. If you’re exploring whether a property or pension is best for your retirement funds, the better option is to focus on buy to let property. This way you benefit from regular rental returns which you will continue to generate for the full course of the property ownership, along with capital growth returns if you see a rise in the property value.

Rather than having to choose between property or pension investments, a commonly asked question on a lot of people’s minds is ‘can I transfer my pension into property?’. This is an investment choice which is growing more common over recent years, and with the UK market performing highly in a number of areas, using your pension to buy property could definitely be an idea worth exploring.

While using your pension to buy property is certainly possible, it’s a good idea to seek the advice of a financial expert who has expertise in this field. There are also limitations to doing this, such as the fact that HMRC is known to heavily tax those using a pension to buy property. This includes both buy to let properties and residential properties. To understand the concept of using pension funds to buy property a little more, let’s explore the pros and cons.

 

Benefits of Buying Property With Pension Fund

Property investment has the potential to build a highly attractive retirement fund. Financial experts such as the Bank of England’s Andy Haldane have expressed views on property being the best way to save for retirement due to continuous growth in property prices. If you’re willing to take the risk, buying a property with a pension fund can give your existing savings a huge boost. This is, however, dependent on the type of investment you make. By investing in top-performing UK cities for buy to let, you give yourself a better chance of making large returns through both rental income and capital appreciation.

While you may instantly think of property investment as a pricey strategy that you’d never afford, you would be surprised how affordable this can be if you select the right investments. In some areas such as Liverpool, you can find lucrative opportunities for less than £100,000. If you invest in off-plan property, prices can become even lower due to being offered below-market discounted rates.

 

 

Risks of Buying Property With Pension Fund

While using your pension to buy property might seem like a lucrative venture, there are, however, some risks and downsides that come with this decision. The main disadvantage of using pension funds to buy property is the fact that you’re unable to access your pension until you’re 55 years old. This means that you would need to wait until you reach this age to purchase your buy to let property, which could be a while away depending on your current age.

Even though property investment has one of the lowest risk levels of any asset class, another downside is that you leave yourself at risk of losing your pension funds. If you haven’t properly researched the buy to let market and looked into cities and regions with the strongest predicted growth and stability, market decline could cause your investment to suffer. If your property was to decrease in value, you could lose money that you were counting on for your retirement.

As mentioned above, there are some hefty taxes that can come with buying property with a pension fund. For anything above £50,000, you will be taxed 40%, while anything over £150,000 will be taxed 45% in the 2019/20 tax year. After these taxes have been taken from you, it might not be worth your while using your pension to buy property.

If you decide that you want to proceed with using pension funds to buy property, there are certain steps you need to take. Your first step will be to discuss your plans with your pension provider and inform them that you’re interested in using your pension to buy property. They should advise you on what to do next. You should also make sure you consult an expert during this process in order to find information on restrictions that apply to the different property types you may be interested in.

As an alternative to residential buy to let, some people decide that using their pension to buy commercial property is more beneficial. In many ways, this can be the best option when it comes to buying property with a pension fund, as you won’t need to pay tax on any income your investment generates if you hold it in a self-invested personal pension due to this being a tax wrapper. You also won’t need to pay any capital gains tax with a commercial property. Commercial property investments include things like shops, office blocks, care homes and restaurants.

While these kinds of investments can be useful for those using pension funds to buy property, residential buy to let tends to be the most attractive property strategy. This is because it can be more difficult to find a replacement tenant for your commercial property, which could leave you with void periods where you lose income. On the other hand, finding a tenant for residential investments tends to be easier due to high rental demand in a lot of UK cities.

Can Your Home be a Pension?

Some people consider the property they live in themselves to be part of their pension. While property is certainly an appreciating asset, especially if the home you purchase is based in a high-growth area, you’re relying on significant long-term growth in order to make enough money to live on for your retirement. Not to mention the fact that you may not wish to sell your home by the time you retire.

When people are thinking of whether to invest in property or pension funds for their retirement, they’re usually contemplating buy to let or pension investments rather than a residential home. If you’re exploring whether a property or pension is best for your retirement funds, the better option is to focus on buy to let property. This way you benefit from regular rental returns which you will continue to generate for the full course of the property ownership, along with capital growth returns if you see a rise in the property value.

Can I Transfer My Pension Into Property?

Rather than having to choose between property or pension investments, a commonly asked question on a lot of people’s minds is ‘can I transfer my pension into property?’. This is an investment choice which is growing more common over recent years, and with the UK market performing highly in a number of areas, using your pension to buy property could definitely be an idea worth exploring.

While using your pension to buy property is certainly possible, it’s a good idea to seek the advice of a financial expert who has expertise in this field. There are also limitations to doing this, such as the fact that HMRC is known to heavily tax those using a pension to buy property. This includes both buy to let properties and residential properties. To understand the concept of using pension funds to buy property a little more, let’s explore the pros and cons.

 

Benefits of Buying Property With Pension Fund

Property investment has the potential to build a highly attractive retirement fund. Financial experts such as the Bank of England’s Andy Haldane have expressed views on property being the best way to save for retirement due to continuous growth in property prices. If you’re willing to take the risk, buying a property with a pension fund can give your existing savings a huge boost. This is, however, dependent on the type of investment you make. By investing in top-performing UK cities for buy to let, you give yourself a better chance of making large returns through both rental income and capital appreciation.

While you may instantly think of property investment as a pricey strategy that you’d never afford, you would be surprised how affordable this can be if you select the right investments. In some areas such as Liverpool, you can find lucrative opportunities for less than £100,000. If you invest in off-plan property, prices can become even lower due to being offered below-market discounted rates.

 

 

Risks of Buying Property With Pension Fund

While using your pension to buy property might seem like a lucrative venture, there are, however, some risks and downsides that come with this decision. The main disadvantage of using pension funds to buy property is the fact that you’re unable to access your pension until you’re 55 years old. This means that you would need to wait until you reach this age to purchase your buy to let property, which could be a while away depending on your current age.

Even though property investment has one of the lowest risk levels of any asset class, another downside is that you leave yourself at risk of losing your pension funds. If you haven’t properly researched the buy to let market and looked into cities and regions with the strongest predicted growth and stability, market decline could cause your investment to suffer. If your property was to decrease in value, you could lose money that you were counting on for your retirement.

As mentioned above, there are some hefty taxes that can come with buying property with a pension fund. For anything above £50,000, you will be taxed 40%, while anything over £150,000 will be taxed 45% in the 2019/20 tax year. After these taxes have been taken from you, it might not be worth your while using your pension to buy property.

How Can I Invest My Pension in Property?

If you decide that you want to proceed with using pension funds to buy property, there are certain steps you need to take. Your first step will be to discuss your plans with your pension provider and inform them that you’re interested in using your pension to buy property. They should advise you on what to do next. You should also make sure you consult an expert during this process in order to find information on restrictions that apply to the different property types you may be interested in.

What About Using a Pension to Buy Commercial Property?

As an alternative to residential buy to let, some people decide that using their pension to buy commercial property is more beneficial. In many ways, this can be the best option when it comes to buying property with a pension fund, as you won’t need to pay tax on any income your investment generates if you hold it in a self-invested personal pension due to this being a tax wrapper. You also won’t need to pay any capital gains tax with a commercial property. Commercial property investments include things like shops, office blocks, care homes and restaurants.

While these kinds of investments can be useful for those using pension funds to buy property, residential buy to let tends to be the most attractive property strategy. This is because it can be more difficult to find a replacement tenant for your commercial property, which could leave you with void periods where you lose income. On the other hand, finding a tenant for residential investments tends to be easier due to high rental demand in a lot of UK cities.

Pension Vs Property: What Should I Invest in for the Highest Retirement Funds?

Whether or not you choose to invest in a rental property or pension, or use your pension funds to pay for your buy to let purchase, this is a decision that requires lots of research and consideration. As a rule of thumb, if your pension fund is something you’re relying on to facilitate a comfortable retirement, you should be cautious about buying a property with your pension fund.

One of the most crucial pieces of advice when it comes to investments is to diversify your investment portfolio as much as possible. With this in mind, combining a pension with a property investment venture could be the key to a lucrative retirement fund. This way, you don’t need to choose whether to invest in property or pension and can benefit from the two methods at once. Let’s look at the reasons why this could be the most beneficial strategy to consider.

Benefits of Combining a Pension With Property

By investing in multiple assets – in this case, a property and pension – you spread your risk. If, for instance, the property market was to suffer in some way and you lost income, you would still have your pension to fall back on. This will give you better peace of mind that whatever happens, you can still expect a comfortable retirement. If you limit yourself to either property or pension, you won’t benefit from this extra security.

You’re more likely to end up with a larger retirement fund if you invest in property alongside your pension. With the right buy to let investment, you can generate consistent returns through rental income which you could then either put towards your pension or an additional savings account such as a Lifetime ISA. Then, if the market has grown in value over time and your property is worth a lot more than it was when you first purchased it, you can benefit from a large lump sum of returns thanks to capital growth.

For a lot of people, investing in one property is just the beginning. Many first time buy to let investors go on to make further investments and build a property portfolio. This then provides retirees with a passion and new role to pursue even after they’ve retired from their full-time role. Investing solely in a pension vs property combined with a pension is a lot less hands-on and gives you less control of your financial growth.

Unlike using your pension to buy property, you don’t have to wait till you’re 55 to make your investment. This means that you’ll be able to invest at the right time in order to get the full benefit from your investment. For instance, the property market in the UK is currently affordable in certain cities such as Liverpool, but with huge house price growth predictions expected. If you were to purchase a buy to let property in Liverpool now, you could take advantage of these lower prices and higher potential, maximising your returns on top of your pension savings.

Financial experts such as the Bank of England's Andy Haldane have expressed views on property being the best way to save for retirement due to continuous growth in property prices.

Amy Jackson, RWinvest

Tips for Building an Attractive Retirement Fund

If you’ve now made up your mind on choosing either a pension or property investment, or if you’ve opted to pursue both, here are some tips and pieces of advice to help you build the most lucrative retirement fund possible.

 

Choose a Suitable Pension Provider

If you haven’t already got a pension, it’s important to begin this process by finding the best pension provider for your needs. There are a range of pension providers out there in the UK, and a choice of different pension types. The most popular type of pension is a workplace pension, in which you and the business you work for will pay funds into your account each month. With trust-based workplace pensions, a board of trustees will manage investments using the money you and your employer have paid. Workplace pensions can be the ideal choice for those who want to invest into a pension with a more hands-off approach, while also benefiting from additional funds deposited by their workplace.

If a workplace pension isn’t suitable for you, either because you prefer to be more hands-on with your pension savings or you’re self-employed, you should consider a personal pension. Personal pensions work in a similar way to workplace pensions in that you will pay a set amount to your chosen pension provider each month. The main difference is that unlike a workplace pension, you won’t benefit from your workplace paying into your account, and you will need to do some research to find the ideal pension provider and to find out which funds are best suited for your needs. You may find that taking the advice of a financial advisor is the best way to select a provider for your personal pension, making sure you don’t rush into the wrong plan for your needs.

 

Consider a Lifetime ISA

Saving your money into an ISA is another great way to build up your retirement fund, and many people choose to do this instead of, or as well as, investing in a pension. One of the best ISA accounts for this purpose is a Lifetime ISA. Lifetime ISAs are savings accounts which allow you to save up to £4,000 a year and benefit from an interest rate of 1.4% AER variable along with a 25% state bonus. This means that within 35 years of saving £4,000 per year, you will have £166,973 towards your retirement – £25,000 of which is the government bonus.

If you have the money to do so, it’s definitely beneficial to save money into a lifetime ISA on top of investing in a pension and property. Combining these savings with your property and pension funds will maximise your overall retirement funds massively. Bear in mind, however, that you can’t access savings in your lifetime ISA before you retire without paying a withdrawal charge of 25% of the amount withdrawn. You can also only receive your bonus if your money remains untouched for a period of 12 months after first opening the account.

 

Do Your Research on the Best Buy to Let Areas

With an investment property, pension, and ISA, you’re on the right track to building an attractive fund for your retirement. The important thing to keep in mind, however, is to be selective with the property investment choices you make. Not every property opportunity will provide you with the best chance at success. For instance, some areas in the UK will offer lower rental yields which will impact your potential rental income. Certain cities are also displaying negative property price growth, which can limit your potential returns through capital growth.

Researching the best buy to let areas is essential if you want to make sure your investment is worthwhile. Some of the best cities in the UK for investments are currently those in the North West region, such as Liverpool and Manchester. Investments in these cities can lead to a more comfortable retirement due to their high yields (up to 10% in Liverpool’s L1 postcode), and strong capital appreciation. Savills has predicted that the North West region will see the largest level of growth in the UK by 2024, with a 24% increase. Investing in Liverpool also gives access to some of the most affordable properties in the country, allowing those with smaller budgets to get involved with a property pension investment.

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Don’t Want to Choose Between a Pension or Property? Make a Pension Property Investment Purchase Today

Are you ready to start saving for your financial future with the help of property investment? Here at RWinvest, we offer property investment opportunities in the very best UK locations for buy to let. With prices from as low as £59,995 and rental yields of up to 8%, you don’t want to miss the investments on offer. Contact us today to discuss our current property opportunities and find an investment that meets your personal needs and goals.

DISCLAIMER

This ‘property vs pension’ guide has been written to provide information and education on a common theme regarding investments in the UK. The information within our article should not be taken as investment advice, and we urge anyone exploring investment options to seek out financial advisers and carry out independent financial research before making a final decision.

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