When it comes to retirement, you may often hear expats say, “My property is my pension”. But what does this mean? Usually, it’s one of two things. Either buying the biggest house they can afford and downsizing later or a “buy-to-let” property. Sometimes, combined.
PROPERTY
The property market has enjoyed extraordinary growth over the years. However, investing in property at the expense of a pension could cost dearly later.
But unlike a pension, money invested in property is not locked away until a certain date. Providing you already own the property and that you are able to find a buyer or tenants, you can start reaping the benefits immediately.
Risk: Changes to the housing market, tax rules and even the location you live in, could end up significantly impacting your wealth. Buy-to-lets may also not be as profitable as you expect, if you can’t find tenants or if rent doesn’t fully cover any costs over time. Liquidity may be the biggest problem.
Tax: Using the UK for example, you might have to pay Capital Gains Tax on any increase in the value of the property when you come to sell and income tax on rental income. Stamp duty will also normally apply above £250,000.
Costs: In 1995, UK houses cost around nine times the average salary. By 2022, that had shot up to nearly ninefold. The interest on property loans can also be significant sum over a period of time, while the challenge of repaying the debt before retirement creates a significant risk, lacking the benefit of compounding growth from savings not allocated to property. Additional costs include legal work, surveyors, renovation and upkeep.
Practicalities: Do not underestimate the stress, time and effort involved. Buying and selling a house means juggling estate agents, solicitors and mortgage lenders. Buy-to-let can be a hassle and costly over the long term. Being a landlord means you will have to negotiate letting agents and tenants. Plus, you’ll need to keep on top of things such maintenance, repairs and insurance.
Selling often means overhauling your life. Downsizing is an emotionally-charged decision. One in three people become put off by downsizing because in reality, they are too attached to their family home and a smaller property means less space.
PENSION
Risk: Your private pension is usually invested in the stock market so the value of the pension will normally depend on the market performance of the underlying investments. Diversification over many stocks or markets can spread your risk. You could choose your own investments to match your personal goals, interests and attitude to risk with help from a related adviser.
Tax: Your pension is usually in a tax-efficient wrapper. There should be none to pay on any dividends or interest from investments within that pension wrapper. Any growth is free from Capital Gains Tax. At retirement, when you access your private pension plan, tax rules will depend on your circumstances and residence. You can legitimately reduce your liabilities with structured withdrawals and geographical location (bank account & residence) to which money is sent.
Costs: You don’t need much money to get started with a pension. Unlike a property, you don’t need a large lump sum. You can save little and often, as long as it is consistent. If you’re working, you should be paying a little bit from your salary each month. Your plan will have fees and those are covered during the advice process with a professional. They also become more cost efficient over time. This type of pension saving should be treated with the same personal discipline as when taking out a loan. A sensible funding plan can help you to navigate most situations over time.
Practicalities: Your pension, like your house, is your responsibility. You can seek help to understand and manage those responsibilities from a qualified financial adviser. Any state pension due is unlikely to be enough for a decent retirement, so it will be your responsibility to make up the rest. Do this by checking you are paying enough to your own private scheme and keep track of that investment regularly.
SUMMARY
The best course of action is to ensure that, where possible, you use both types of investment simultaneously. Not one sacrificed for the other. This approach will diversify your risk further and allow you to increase your options for asset growth, flexibility and liquidity later.
