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Pension vs property: Which investment is best for a comfortable retirement? 'Robust route'


UK average house prices increased by 8.6 percent over the year to February 2021, the latest figures from the Office of National Statistics (ONS) show, up from eight percent in January 2021. Average house prices increased over the year in England to £268,000 (8.7 percent), in Wales to £180,000 (8.4 percent), in Scotland to £162,000 (8.0 percent) and in Northern Ireland to £148,000 (5.3 percent).

Michael Martin, Private Client Manager at 7IM, recently shared his thoughts on what the latest figures for people thinking about investing in property.

“The halcyon days of when house prices were rocketing, and yields were growing, are over,” he said.

“With house prices stagnating and onerous tax changes, investing in property is no longer the golden nest egg it once was.

“Whilst property investments can have some benefits from a retirement perspective, relying on a property or a portfolio of property doesn’t really make much sense anymore.

“Yes, it may offer a yield but when it comes to selling a property, unlike your investments in your pension, you can’t sell it in stages and it could mean a hefty capital gains tax bill upon sale.

“In addition, the headache associated with finding new tenants, repair and maintenance costs as well as void periods cannot be underestimated.

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“Furthermore, property counts towards your estate and is subject to inheritance tax (IHT), so if you’re unable to sell the property before you pass away, those who inherit it could end up with an eye watering 40 percent IHT bill. Not ideal.

“The problem with a property is that it’s an all-or-nothing, lumpy asset to dispose of if you want some cash.

“You can also be forced to sell it all at precisely the wrong time.

“During the financial crisis, people who’d lost their jobs and needed to support themselves were forced to sell their houses for a fraction of what they’d have been worth just months earlier.”

Multiple assets, rather than multiple houses

According to Mr Martin, with a cocktail of concerns facing residential property investors, property is definitely not “as safe as houses”.


As such, investing in a diversified portfolio is likely to be a far more “prudent approach” when it comes to funding retirement, he said.

The Private Client Manager said: “Investing elsewhere doesn’t have to be a roller-coaster ride of risk. It’s possible to invest the proceeds in a ready-made investment portfolio made up of a variety of assets, including global equities, bonds, alternatives and even property too.

“So spreading the risk, and not putting all your eggs in one basket. Another egg analogy.

“One of the advantages of investing in these multi-asset funds is that you benefit from in-built diversification, which can help smooth returns over the long term.

“If one asset class is down another might be shooting the lights out – they can balance themselves out.

“They also have the added benefit of having an investment professional look after the day-to-day management of the portfolio, including what assets to allocate where and when.

“And you can sell it down in smaller chunks if you want to access the cash or give assets away for inheritance tax purposes.”

Get smart with pensions

With investing in bricks and mortar not being the “lucrative investment it once was”, Mr Martin said investing in a pension is a “more robust route” to a comfortable retirement.

“One of the main attractions of a pension is the tax relief that you get on your pension contributions,” he said.

“The Government will give your pension contributions a ‘top up’ or ‘bonus’ in the form of tax relief of between 20 percent and 45 percent (or between 19 percent and 46 percent for those in Scotland) depending on your level of income tax.

“This means for every £1 that is invested in your pension the actual cost to you could be as little as 55p (or 54p).

“Another major attraction is that under auto-enrolment, so long as you qualify, your employer will contribute a minimum of three percent to your workplace pension – though many companies offer much more generous contributions than this.

“On top of the Government tax relief, these contributions can give your pension savings a significant boost, so it’s well worth investing in your workplace pension.

“In addition, and something that is often overlooked when it comes to pensions, is the breadth of investment choice that is available.

“A Self Invested Personal Pension (SIPP) for example lets you invest in a variety of assets including shares, bonds, investment trusts, funds, currency, commodities and even property, to name but a few.

“This allows you to create a truly diversified investment portfolio in your pension that can be tailored to generate growth or income depending on your retirement goals.

“For the vast majority, investing in a pension is a far better option for retirement than investing in property.

“As well as the generous tax breaks and potential for significant investment growth, pensions offer far more flexibility than property, which makes retirement planning that little bit more straightforward.

“As ever though, if you’re unsure about what’s best for you, then it pays to take financial advice.”

It’s important to note tax rules are subject to change, and taxation varies depending on individual circumstances.

This article does not constitute advice or a recommendation; please consult a financial adviser. People should be aware the value of investments may go up and down and they may receive back less than they invested originally.


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