Property vs. Pensions
How should you prepare for your retirement? Should you put your money into a pension, or should you rely on the house price growth of your property to pay for you in your dotage?
Today's debate is on what is the best investment for your retirement - a pension or a property? We asked Tom McPhail, from pensions provider Hargreaves Lansdown, and Steven Hilton, from the National Landlords Association, to tell us what they think.
Tom McPhail, Hargreaves Lansdown
While for some people investing in a property as a retirement strategy will work, for most people it is likely to end in disappointment. For the majority, the simplicity, the risk controls and the tax breaks of a pension will prove a better bet.
More than any other issue, the reason that I'm very negative about property investing for retirement is that it can represent a huge concentration of risk. For many people this means that you aren't just betting on one asset class - property - you are betting on one or two assets, the individual properties. In portfolio risk control terms it doesn't actually matter what the asset class or assets are, it is fundamentally a very bad idea.
A growing population, diminishing household sizes, falling borrowing costs and increasing urbanisation have all driven property prices upwards over the past thirty years.
Some of these trends will continue, particularly the growing population and the urbanisation trend. Set against these factors are the increasing borrowing costs which are already apparent in spite of the record low level of Bank Base Rate, and the ageing of the population.
The baby boomers have been through the peak phase of their economic activity and they are now hitting retirement. Because of improvements to life expectancy when the next wave of boomers (those born in the 1960s) get to retirement, many of the first wave will still be there. All these people will be trying to release capital from their homes and convert it into an income, through equity release and downsizing. By then, the property market will look a very different place.
A broad buy-to-let portfolio would be much less risky, however for most investors this is simply an unrealistic proposition.
By contrast, a pension investor has many advantages in their favour. It is easy to get access to a pension, with sums of as little as £20 a month. Pensions come with tax breaks from the Government - contributions are increased by 25%, while investment growth is largely tax free. With a personal allowance from the age of 65 of £9,490 (2009/10), for many people a significant proportion of their retirement income will be tax free too.
Pension investors have the ability to manage their investment risk, from cash to commodity funds, from index linked Gilts to emerging markets, they can choose how, when and where they invest their savings. As an added bonus, from 2012 onwards, employers will be required by law to offer employees a pension contribution as part of their employment.
The stock market is back where it was ten years ago, prompting some commentators to suggest that investing in equities doesn't work. This isn't the first time this has happened though; between 1913 and 1922, 1936 and 1950 and 1969 and 1982 the stock market effectively moved sideways.
For long term investors, particularly those who are looking to put some money aside every month, a regular contribution from monthly salary into a basket of stock market based pension funds is the most efficient, the most accessible and probably the most rewarding way of saving for retirement.
- Watch this video: Property vs. Pensions
Steven Hilton, National Landlords Association
Property or pension? That is the question. But what's the answer that will see us safely through retirement?
With nominal house price increases over the past 20 years at something like 600%, property investment may have its critics but who can argue with that level of growth?
Pensions in the UK remain not only complicated but also inflexible. Yes, there is some tax relief but with reliance on stock markets, your pension money is by no means guaranteed.
Property, on the other hand, is a physical asset with a track record of significant growth allowing owners to sell precisely when they wish. The sale proceeds can be used for anything.
However, when the time comes to cash in a pension - whatever might be left, depending on the financial advice you have (or have not) taken - it is the annuity which will provide the actual income through retirement. And here's the health warning. In order to maintain the lifestyle you enjoyed as a worker, your pension pot is going to have to be large in order to buy a half-decent annuity.
The arguments go on.
Property can be easily handed down to loved ones when you die. Pensions cannot.
Investing in property is also relatively low risk. A buy-to-let investor aims for their rental payments to cover the mortgage but they also benefit (hopefully) from long term capital growth. Landlords who know what they're doing have their eye on a long term game with the average landlord holding a property for 15 years.
So is this too easy?
Part of the problem with individuals who have invested in property is that they tend to be asset rich and income poor. But a planned and balanced approach to retirement, with diversification of investments, probably remains the most sensible way to enjoy your later years. After all, it is better to have been planning and saving for retirement in some way rather than not given the matter any thought at all.
So who's right: Tom or Steven? Don't let the debate end there - tell us what you think using the comments box below!