Should I Invest In Property or into a Pension?

Buying an investment property is a British obsession and although it’s not easy people tend to be a lot more comfortable with the idea than investing money in their pension.  This makes sense, as most British people own their own home and so have experience of what’s involved and have a much clearer idea on how house prices move than investments in a pension.  But is it often the right choice.

There’s no denying that Property can be a great investment for the long term, and paying the capital from your rent can allow you to pay off any mortgage to give you more access to the capital.  And in the short term onwards you can earn a steady income from the rent.

There are a few realities that you need to be happy with before you proceed.  There is going to be a high initial investment required, and these savings are going to have to come from after tax money.  Most buy to let mortgage providers require at least 25% of an initial deposit on a house and there is an addition 3% stamp duty tax on second home purchses.

Also, do you want to be a landlord?  It can come with a lot of hassle looking after tenants as well as finding new ones when they move on.  You can pay someone to do that work, but then you really are eating into the profits on your venture.

The last thing to think about is whether you’ll need access to the money you’ve got locked away in the property, it can take a while to sell.  Also, there’s a higher rate of Capital Gains Tax on rental property which will take a chunk out of your profits.

On the other side Pensions are very tax efficient.  You can put up to £40,000 per year into your pension which is tax deductible so if you’re paying a higher rate that’s 40%.  And there’s no big initial investment required, you can pay little and often if you like. 

You won’t be able to access this money though until at least the age of 55, but any money in your pension is payable to your loved ones on death and is outside of inheritance tax.

One of the important things to get thie best return on your pension is to invest it in the right place.  It’s generally a very long term investment, 15 years plus so you can afford to take a bit more risk and aim for some higher gains.

I’m a Pensions and retirement nerd and would love to talk you through your options if your interested.  Parker Financial Advice are independent (IFAs) based in Cheltenham, who choose products from the whole of the market.