Is Buy to Let better than a pension for retirement?
This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincolnshire or other local offices.
Britain is unique in Europe for its love of home ownership. In 2018, 65.25% of Britons owned their own property – up from 65% the year before. The idea of buying a property, living in it (or renting it out) and then selling it later for a profit is very popular. Many people even consider property to be a viable route to sustain a retirement income. Buy To Let, in particular, can allow someone to buy additional properties and use rents from tenants to not just cover mortgage costs, but also provide a steady income from the surplus.
Is Buy to Let a viable tool for building a reliable, comfortable retirement income over the long term? Does it beat the benefits of using pensions? In this article, our Grantham-based financial planners at Castlegate offer some thoughts. We hope you find this content helpful. If you want to discuss your own financial plan with us, please get in touch to arrange a no-obligation financial consultation, at our expense:
01476 855 585
info@casfin.co.uk
The pros & cons of Buy to Let in retirement
A Buy to Let property has the advantage of being a tangible asset. You can smell, touch and see bricks and mortar, whilst pensions can seem very “abstract” by comparison. We tend to instinctively grasp the benefits of a property, having lived in one (or many) throughout our lives. It is also true that property has, historically, proven a good investment for many Britons. Today, UK house prices are 65 times higher than they were in 1970. The potential for capital gains from property, therefore, are not to be dismissed lightly. With careful planning, a Buy to Let can also provide a profit throughout the lifetime of the mortgage – perhaps a few hundred pounds, maybe more. At the end of the mortgage, moreover, you can enjoy the lion’s share of the income from tenants’ rent payments, no longer needing to siphon most of it to a lender.
However, Buy To Let does carry its risks. There is no guarantee that a property you buy will increase in value over the decades. If the surrounding area deteriorates and pulls local house prices down, for example, there is little you can do about it. Tenant income is not guaranteed, either. There may be periods of unoccupancy which leads you to needing to cover the Buy to Let mortgage yourself. If interest rates rise in the future, moreover, then your mortgage is likely to get more expensive as your own lender puts their rates up too. This, and other potential rising costs (e.g. storage and letting agents), could also eat into your rental yields. Finally, if the need ever arises to sell a Buy to Let property, there is no guarantee that you will be able to find a buyer easily – or sell the property at the desired price.
The pros & cons of a pension
A pension is usually far more flexible than a Buy to Let property. From age 55 (rising to 57 in 2028), you can access 25% of the value of your pension pot(s), tax-free. The rest can be used for drawdown or to buy an annuity (a product offering a guaranteed income in retirement). The tax benefits of a pension are also very powerful. Whilst saving into one, you can contribute up to £40,000 per year – or, 100% of your earnings (whichever is lower). The contributions will also be “boosted” by tax relief from the UK government equivalent to your highest marginal income tax rate. Someone on the Higher Rate, for instance, would get a 40% “boost”. Pensions can also be diversified far more easily than Buy to Let. Whilst the former is focused on the housing market, a pension can be invested across multiple countries, markets, companies and asset classes. This mitigates needless investment risk.
Pensions also carry their limitations, however. Pension savings cannot be accessed until you reach later life, so you need to be sure that you can lock the money away for a long time. Also, pensions can see their value eroded by investment performance – such as a sudden crash in the stock market. In March 2020, for instance, the Dow Jones Industrial Average crashed by over 2,000 points, bringing many pension funds down with it. In this case, however, the bear market was short-lived and recovery followed later in the year. A final drawback of pension pots to consider is that they can run out, if not carefully managed. Here, following a “safe withdrawal rate” recommended by a financial planner can help keep your pension sustainable.
Conclusion & invitation
All client’s financial goals and circumstances are different, and this can affect how pensions – and possibly Buy to Let – should feature in a financial plan. Generally speaking, using your State Pension along with other pension savings, such as workplace pensions and also perhaps personal pensions, will form the “backbone” of most individuals’ retirement plans.
Sometimes, a Buy to Let (or multiple properties) can supplement the income. Yet the large up-front costs needed for Buy to Let deposits are likely to limit the feasibility of building a big property portfolio that could sustainably cover an individual’s retirement costs over many years.
If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
01476 855 585
info@casfin.co.uk
