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  • Writer's pictureInvestment Synergy Team

Is property still better than pensions?

In 2016 Andy Haldane, the outgoing chief economist of the Bank of England, caused controversy when he said that property was a better investment for retirement than a pension. “As long as we continue not to build anything like as many houses in this country as we need . . . we will see what we’ve had for the better part of a generation, which is house prices relentlessly heading north,” he said.

Five years later and Haldane has declared the housing market to be “on fire”, with the latest figures from the Halifax showing that the average price of a home has grown by almost 9 per cent (£21,000) in the past year. So, do Haldane’s words still hold true? Is property still a better investment for retirement than a pension?

If you have looked at your meagre pension predictions and read the recent reports that the chancellor is keen to curb state pension rises, then you are probably prepared to give anything a go to bolster your funds in later life.

Capital growth

The simplest way to capitalise on rising property values is to invest in a property fund that gives a good return on investment, but accepted is the view that some people also want to actually to own bricks and mortar. Being a buy to let landlord isn’t akin to holding a winning lottery ticket, though; there are a lot of pros and cons to be considered.

Since 2016 a variety of financial and regulatory measures have been introduced that make being a landlord less lucrative than it once was. The result is that nearly a million landlords are expected to review their portfolios over the next two years, with those planning to sell properties outnumbering those planning to buy more, according to a survey by Nottingham Building Society.

In the past you could have a flutter and see where it went. Now you need to think about whether to buy in a limited company or personally, you need to consider the tax situation, plus the mortgage criteria are more stringent.

Do the maths

Property can still work as an investment if you are prepared to put in the work and build up a portfolio of carefully selected properties. The tax regime for buy-to-let property has become less generous, though. A couple of months before Haldane made his original comments, George Osborne, the chancellor at the time, introduced a 3 per cent stamp duty surcharge on additional properties.

It was the first in a series of financial and regulatory measures that would curb the appeal of a buy to let property as an investment. Aside from the extra stamp duty, landlords used to be able to offset mortgage interest payments against rental income, but this has been phased out since April last year. The government has replaced it with a 20 per cent tax credit, which isn’t as beneficial for higher-rate and additional-rate taxpayers, who effectively received 40 per cent and 45 per cent tax relief on mortgage payments under the old rules. All income must also be declared and taxed. What is more, mooted changes to capital gains tax to bring it in line with income tax could hit landlords hard when they come to sell property.

“There is a stark difference in the tax treatment of a buy-to-let property and investment returns on a property fund, and a pension — with pensions and investment returns winning by a country mile.

Buy to let property is expensive to maintain, can be difficult to sell and you could suffer periods where you receive no income, and there is a clear need to weigh up capital growth and cash flow (rental income versus expenditure) - and a reasonable rental yield, ideally around 6 per cent, but typically would net less than 4.5 per cent.

Investment Synergy - Comparable if not better returns can be generated without the general risk and hassle of being a hands on buy to let landlord.....

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