Despite the tax relief benefits many people today are exchanging their traditional pension for property. Is investing property a better way to save for your retirement, should you be using your normal pension contributions to pay a mortgage on a buy to let property?

Since the dot com crash in 2000 there has been very little positive press about the pensions industry, and while the stock markets still have a long way to go to get back to 2000 levels it will be some time before people see their pension funds getting back to their original highs. Then to cap it all after the collapse of Equitable Life one of the UK’s largest pensions companies, many people doubt that owning a pension policy is the rock solid investment that it has often been portrayed to be.

Alternatives

If you’re a firm believer in the stock market over the long haul then one very good alternative to a pension is the Individual Savings Account (ISA), an ISA can prove to be more flexible than a normal pension, seek advice from a financial consultant who will be able to look at your circumstances and advise you.

If the stock market crash has left you with nagging doubts about using the stock market as a safe investment vehicle for your retirement you may well have thought about property. There has been a significant increase in the number of people investing in buy to let properties.

Buy to Let

Having a rental property in your retirement can be very attractive and in the right circumstances can have several key advantages over a traditional pension. One advantage that is very evident is the fact that it gives greater control of the investment. A traditional pension can be quite inflexible, you pay a sum of money every month for your working life and a series of investment managers decide on the best place to put your money, if they get it right you get a nice sum for your retirement, if they get it wrong or the world’s stock market nose dive your retirement may not quite live up to expectations.

With property the investor can choose many of the criteria that will ultimately be the deciding factor in how good an investment is, you can choose the location of the property, the type of property and the market it is aimed at, young professionals, students, or families. With power comes responsibility and some people will relish this opportunity while others would rather not try to guess where the next up and coming area is or whether terraced 2 bed or 3 bed flat is better.

The next advantage is the ability to release the capital more freely (subject to taxes). A pension can only be used to buy one product an annuity. In some cases this may not be ideal. An annuity is designed to provide you with a regular income for the rest of your retirement, now if you come from a family who live well into their 80s, you have excellent health and are planning to retire at 55 the sum of money you will require for an annuity may well be beyond your reach. Also one big potential glitch with an annuity it will stop paying when the last person on the annuity dies, a rental income on a property would continue. If a big consideration in your financial planning is to pass wealth down through your family then a property could be ideal.

Tax

Pensions are tax free, property isn’t, and careful financial planning is paramount to good property investment. You will need t pay stamp duty on the property when you purchase it, then you will have to pay income tax against the income that it generates minus your expenses. You will also run into capital gains taxes when you come to sell the property. Discuss you property investment plans with a tax consultant before you make any decisions so that he is able to advise you about the most tax effective method of purchase and management in your circumstances.

The Risks

Property is not without it’s own set of risk, today the property market remains strong but history does seem to dictate that as with stock market shares a warning should be on the bottom of every property that states “Your investment in this property can go down as well as up” who knows what the next 10-20 years holds for the property market.. Even if the property market stays rock solid and continues to out pace the stock market, it’s always remembering that there will be individual exceptions, a simple change in the local geography of your chosen property can have a dramatic effect on property prices for better or worse. Your investment property will not only be affected by national house market trends but also by micro trends within your chosen location.

Research is a key factor however that said it’s as difficult to research property 10 years ahead as it is the stock market.

Pension or Property?

A property may well be a better investment in your individual circumstance and as people become more investment literate and demand individual investment control property is ideal for self management. Finally buying lots of baskets for your eggs is never a bad thing, use all of the investment tools at your disposal, property, ISA’s. pensions etc. Doing it yourself is appealing but don’t leave out professional advice, markets are always changing and the advice of an authorised financial consultant will prove invaluable.

Tax Consultants Guide 2004

The tax and financial consultants guide

The material provided by Tax Consultants Guide is for general information only and does not constitute investment, tax, legal or other forms of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.