Property vs Pensions

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One of the most commonly asked questions I receive from potential and existing clients is centred on property vs pensions. With so many people asking “should I purchase a buy-to-let property instead of investing into a pension?” I thought it would be good to look at the pros and cons of this tactic. It is worth starting with the point that property should usually form part of a well-diversified portfolio. It is a great asset class because, like shares, property pays you a rent (hopefully) and usually the value rises over time too.

A brass skeleton key lays in a nest for several different concepts.

It does, however, have its problems, some of which are:

  • It is relatively illiquid, i.e., you can’t sell it quickly; it might take months, not days.
  • It is a physical asset, making it vulnerable, for instance boilers can go wrong, roofs can need re-tiling, and general maintenance is always required, all of which cost money.
  • Other people are involved, like tenants, who can fail to pay their rent, not move in the day the old tenants move out, or trash your lovely house.
  • Most people borrow to purchase property, which dramatically increases the risk of the investment.
  • The acquisition costs, like Stamp Duty, lawyers’ fees, searches, and possibly mortgage arrangement fees, are high as a percentage of the overall cost.

The idea of property prices falling may not be surprising, but sadly some people often don’t know or realise it can happen. Let’s look at the property prices over time:


One key risk that investors overlook is ‘gearing’, otherwise known as ‘borrowing to invest’. If I said that I want you to borrow £100,000 and invest it into the stock market, most people would rightly say I had lost my marbles. The risk would be off the scale. So why do most people who purchase buy-to-let properties do exactly this? They borrow to invest, which dramatically increases their risk. For example, they put £25,000 into a £100,000 house, and borrow the remaining £75,000. How much do property prices need to fall for them to lose 100% of their investment? The answer is 25%. If property price falls by 25%, you now have a loan of £75,000, a property worth £75,000 and £0 equity. Even some of the savviest investors miss this key fact. Gearing can exaggerate the growth of your investment, or can wipe it out, but it is important to realise that you are dramatically increasing your risk by doing this.

Mature couple looking at a house. Rear view

Another big problem is tax. Pensions shelter your money from the tax man very efficiently. Growth is virtually tax free inside the pension, and 25% is tax free when you want to draw your money out. The other 75% you are deferring until a time when you will probably have less income, and therefore pay a lower tax rate. There are however another considerations here.

Firstly, the interest of your mortgage is now only partially deductible against the income, so this is increasing the tax liability for landlords with buy-to-let mortgages. This is going to be a nasty surprise for many people, and will mean that their properties are actually costing them money each month.

Secondly, you will now pay an additional 3% Stamp Duty on the purchase of a buy-to-let property. This is certainly going to affect the purchase price, and will probably have an impact on the number of buyers.

Finally, if you are borrowing to invest into property, you need to think about interest rates. Whilst they are at an all-time low at the moment, this will change at some point, and they are only going one way when they do. This will increase your costs, and again mean you risk paying for the privilege of owning them.

These factors on tax when combined with future interest rate rises lead me to believe that there will be a correction in the buy-to-let market in the coming years. I believe that house prices will fall as a result of these effects over the coming few years. Combine this with the fact that many experienced buy-to-let investors chose to sell them at retirement, because of the ongoing headache they cause, I cannot see that buying a buy-to-let property instead of a pension is a good idea.

If you do decide you want to become a landlord in retirement, make sure you seek the advice of a local expert, and make sure you educate yourself before you jump in. Otherwise, as I have seen many, many times, it will prove to be a costly mistake, both financially and with your time; and we all know the latter is our most valuable resource!

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