Historically, property has always been a great investment. One that people often count on as part of a long-term retirement plan. However, it’s important that it’s not the only element in your plan and that you’re not investing in property at the expense of contributing to a pension.
This does not constitute advice and advice should be sought in all instances before acting on it.
We take a look at a few of the areas to consider when choosing whether property can really be enough to replace a pension when it comes to retirement savings and investments.
Return on Investment
Property
Property has always been a good investment – the proof is in the pudding as UK house prices have grown by around 34.7% over the last ten years.
If you choose to go the buy-to-let route, rent could boost your income over the years, but unless you’re saving or investing that, it won’t be much help later on in life. If you plan to downsize and use the cash profit from the sale of your home to fund your retirement, you might not have nearly enough.
Pension
Meanwhile, the UK stock market has grown by a whopping 63.9% over the last ten years.
And under current automatic enrolment rules, depending on eligibility, your employer also contributes to your pension, so between that and what you pay into it, the extra money can really grow over time. Turbulent times in the stock market won’t have too much of an effect as long as you’re invested for the long haul.
Tax
Property
If you’ve chosen the buy-to-let route, you’ll have to worry about Stamp Duty Land Tax (SDLT) when it comes to purchasing your property (rules around SDLT are always changing but will apply if you’re purchasing multiple properties), and income tax from rental income while you still own the property.
When it’s time to sell your home, you’ll then have to pay Capital Gains tax (CGT) (18% or 28%) on any increase in property value.
Pension
While you have multiple tax rules to worry about when it comes to property, your pension is a tax-efficient wrapper for your money. You won’t have to pay income tax on any dividends or
interest from investments within your pension and growth is free from CGT.
Once you reach state pension age, you can access 25% of your pension tax free upon retirement, with the remaining subject to taxation. Plus, if you only take out the money you need and spread out withdrawals over different tax years, you can control your taxable income and reduce the tax you pay.
Risk
Property
The housing market can be quite volatile and focusing only on property as a retirement plan increases your risk, so the advice for investing rings true here – diversify!
Changes in the housing market, tax legislation, location changes, and wider economic disturbances could all affect your property investments. And there’s no guarantee you’ll make the kind of profit you’ll need during retirement, or even a profit at all.
Your buy-to-let ventures might not be as successful as you’d hoped or you might need to cash in during a downswing in the market, leaving you without the funds you need.
Pension
Of course, the stock market isn’t exactly a sure thing either. And since the value of your pension will depend on the performance of your investments (unless you’ve got a defined benefit scheme) you might not get back as much money as you’ve put in.
As with everything, diversification can mitigate your risk, so if you’ve been lumped into the default fund for your pension and aren’t keen on the investments, feel free to change them or shift allocations until you’re happy with the mix.
Plan with a pro
Your retirement is supposed to be about relaxing after decades of working and spending quality time with family and loved ones. However, if you don’t plan accordingly, you won’t have the finances to support your retirement lifestyle. With a mix of investments and savings, including both property and pension, you’ll be set for your golden years.
Dental & Medical Financial Services have been helping doctors and dentists prepare for retirement for many years. If you need financial advice to start your planning, get in touch with us today.
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