The end of an old year is a good time to start planning in advance for the next one. In 2022 adding to your pension pot or starting a new one might be part of your plans. So here we’ll look at the pros and cons of investing in property as a pension, and at whether property even can be a kind of pension.
First of all what is a pension exactly?
A pension is generally thought of as a way of saving for the future. Particularly as a way of providing an income for when you want to retire.
To achieve this any kind of pension scheme needs a few basic requirements:
* It should be a way of growing your money. Ideally growing it as much as possible – and certainly more than bank interest/the rate of inflation.
* It should be safe and secure as much as is possible. You should be sure you will be able to get your money out when you want to retire.
* It should be as tax efficient as possible. Tax laws and regulations relating to your pension should make it an efficient way of saving for the future.
* It should be simple (or fairly simple) to do.
So bearing these points in mind how does property stack up as a pension?
* Property values have generally always grown over the years, which is perhaps where the idea of property as a pension comes from. There’s no guarantee they will however, and there have been periods when property values have fallen.
* The well-known phrase ‘safe as houses’ is a well-known phrase for a reason. Bricks and mortar is generally thought to be a safe place to put money. Yes, it’s not 100% safe – real property can be destroyed, stolen or confiscated – but it’s relatively safe.
* Tax policies have generally favoured property buying and owning property over the years. This is always something that’s subject to change however.
* Buying property is relatively simple to do. Yes, it’s not THAT simple. But it is relatively simple compared to other alternatives like directly investing in commodities, the stock market, currencies or antiques and so on which all require a lot of effort and expertise to get right.
It’s perhaps worth mentioning that property does have a few advantages that other kinds of investments generally do not offer as well. With property you can borrow money to invest in your pension, and also benefit from leverage. With property other people actually pay into your property pension for you – with buy to let for example. With property you can also generally get your money out whenever you like to a great extent rather than waiting for retirement age.
Some pension options are simpler than property of course. With a pension plan from a pension company all the investing, following the market, buying and selling etc. is done for you. You don’t have to manage your plan day to say (unless you want to) as you might have to do with a property investment. That said, you have to wait until retirement age to actually get most of your pension from a pension plan. And the return is still not guaranteed, unless you have an increasingly rare final salary scheme.
So what should you do if you want to invest in property to provide a pension?
* Consider the pros and cons of property investment carefully. Make sure it is right for you.
* Consider property as a long term investment. This way you will hopefully benefit from an uplift in prices over the long term even if they fall in the short term.
* Consider tax efficiency. Consider what are the most tax efficient ways to invest in property for pension purposes. For example should you invest through a limited company or a SIPP or SSAS?
Take expert financial advice on this and all other methods of investing in property.
* Diversify and invest in different types of property. Rather than just buy to let consider projects like renovation or commercial property as well. This should be safer, as if one investment performs poorly others will hopefully do well and cancel out any losses.
Indeed, it might be a very good idea to diversify in the wider sense of the world too. As well as investing in property for a pension consider other investments for your future including cash savings, a pension plan and any other types of investment that are suitable for your needs.
At the end of the day it’s fair to say that, yes, property can still be a perfectly valid way of building a pension. It’s essential, however, to think carefully about what you will do, plan everything properly and take expert financial advice where you need it.
