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Property vs pensions - which is the best choice for retirement?

Alistair Morris, CEO Pagan Osborne

The Bank of England’s chief economist Andy Haldane made headlines in August when he claimed in an interview with the Sunday Times that he considered property, rather than a pension, the best option for retirement planning. 

He went on to say, “As long as we continue not to build anything like as many houses in this country as we need to ... we will see what we’ve had for the better part of a generation, which is house prices relentlessly heading north.” So is he right? 

Buy-to-let properties have yielded fantastic returns to have-a-go landlords in the past, however this income has now come under pressure from the supplementary Additional Dwellings Tax of 3%. As a result the National Association of Landlords estimates that up to half a million rental properties will be sold off in the next 12 months.

Post-Brexit there has been speculation that house prices will fall, impairing the confidence of investors looking to shore up their savings in bricks and mortar. However as Mr Haldane points out, a lack of supply has been pushing property prices and rents up year on year, and demand is not going away. 

Rental proceeds can provide a reliable stream of income. Figures from the Scottish Government show that from 2010 to 2015 rents across Scotland as a whole increased by up to 14.4% and by up to 18.5% across Fife. Meanwhile, should you plan on downsizing once you reach the end of your working life, an overall trend of growth over the last 30 years means that you should benefit from an upswing in the value of your property. The average price of a home sold in Scotland today is £143,282, up 4.6% from 2015 (Registers of Scotland data September 2016). 

The Royal Institute of Chartered Surveyors agree with Mr Haldane, and anticipate that this growth will continue at a rate of 3.3% every year for the next five years. So whether you intend to sell or rent out a property, the indicators for building your pension through property look very positive.

Changes to the way pensions can be accessed which were introduced last year have made this option more appealing as well, as they were intended to remove some of the barriers which had previously prompted people to look elsewhere for financial security in retirement. These include withdrawing a tax-free lump sum of up to 25% over the age of 55 and making it easier to pass on your pension to loved ones.

However, returns on investments in a pension portfolio are certainly not guaranteed and those lower risk portfolios will often yield a smaller financial return. Additionally, despite the  Government’s efforts to make them clearer, pensions are a very confusing topic!

The often overwhelming array of options can leave you uncertain what the best and most efficient option is. 

In terms of planning for your life after retirement, it really does come down to personal preference. Some people love finding the right property to manage and rent out, others prefer to invest in a pension fund and let it tick away. Both options present the opportunity of achieving solid returns, however it’s important to ensure you have a clear idea of the options and risks, so seek advice from a property professional or financial advisor before you embark on a course of action.

Alistair Morris is CEO of Pagan Osborne. To contact him call 01334 653 777 or drop him an email.

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