Why "Property is my Pension" is a dangerous view to take..

With the UK population living longer than ever, the ways in which you save for retirement can have massive consequences. Property has long been seen as a sound investment. But with house prices flat-lining and an increasingly restrictive regulations on buy-to-let landscape, can it still beat a pension for long-term growth?

Here, we explore the pros and cons of both pension and property investment to help you decide what’s best for you. If you’re considering investing in property and want impartial advice on your mortgage options, contact me direct on here.

Investing in buy-to-let property - Property values have soared in recent decades, prompting many investors to build expansive property portfolios now worth hundreds of thousands, or even millions, of pounds. But is investing in property still a good bet?

Headlines have recently warned that the bubble has burst in some regions – for example, the latest LSL Acadata house price index, released on Monday, showed a 2.5% year-on-year drop for London house prices. Other areas, however, are continuing to see growth, with Wales experiencing annual house price growth of 4.8% in the year to May (2018). It’s not uncommon for the market to experience blips as supply, demand and the mortgage-lending criteria adjust themselves. For this reason, it’s important to see property as only a long-term investment.

Is buy-to-let losing its appeal? There have been a raft of changes for buy-to-let landlords in recent times, without doubt making property investment less attractive than it once was. Mortgage interest tax relief has dropped to 50% and will be cut to zero in 2020, with landlords instead given a 20% tax credit on their mortgage interest; Rental income by 2020 will be at the individuals marginal rates - If you are a HRT payer this will mean paying 40% on your rental income before you even see any of it; mortgage-lending criteria are tightening (including affordability calculations); some councils have introduced mandatory landlord licensing; and buy-to-let properties now need a minimum EPC rating of E. Investors have also had to pay an additional 3% in buy-to-let stamp duty since 2016, and higher and additional-rate taxpayers are charged 28% in capital gains tax (CGT) on property, compared with 20% on other assets. Landlord responsibilities can also be time consuming. Even if you use a managing agent, you’ll need to factor in the danger of problem tenants, periods when the property is empty, running costs, insurance and property maintenance. Despite these challenges, property investment can be profitable in the right circumstances. In fact, recent research predicted that someone investing in a buy-to-let property now stands to make an average ￡265,000 in capital gains and rental income over a 25-year period.

Pros: Property values have shown phenomenal growth in recent decades. The average house price in February 2018 was ￡225,047, up from ￡57,726 in April 1990, according to the Land Registry. The combination of rental yields and capital growth means you have both immediate income and the potential for long-term profit. You can sell the property at any point and invest the money in other ways.

Cons Buying, maintaining and selling property takes more time than contributing to a pension. If you have a mortgage, you run the risk of being left in negative equity if house prices fall. Tax changes have made property investment less financially rewarding than it once was. Mortgage providers are tightening their lending criteria. Property counts towards your estate and is therefore subject to inheritance tax. You can't sell half a house - So for Capital Gains Tax perspective you need to sell the whole asset rather than a gradual sell off to take advantage of the CGT annual allowance. What about periods of having no tenants therefore no income? Tenant issues? There are several TV shows about the nightmares of having long term non paying tenants and the thousands or tens of thousands in lost revenue - Not to mention the horrendous damage inflicted by some tenants.

Should you see your own home as your ‘pension’? Some people choose not to put money into a pension, instead saying that ‘their house is their pension’. But treating your own home as your retirement fund can come with problems – after all, you’ll always need somewhere to live. IF you sell the house then you may still have to pay rent - Has this been factored into your income level expectations in retirement? The most obvious course of action if you don’t have a large pension but have built up significant equity in your home (or paid off your mortgage entirely) is to downsize upon retiring. However, if you’ve lived in the same house for a long time it can be an emotional wrench to leave, and many people are surprised by how difficult they find it adjusting to life in a smaller property. Moving house also carries significant costs – not least stamp duty, which can run into thousands of pounds. Equity release – where you borrow money against your home while still living in it – is your other option if you have a property but only a small pension. This is an expensive option, though, and will usually make a significant dent in your descendants’ inheritance, so seek independent financial advice before releasing cash in this way.

As is the cases with many situations there is no right or wrong answer to this question. It is clear however that BTL and property still has a big part in the UK's heart when it comes to planning for income in retirement - It could still form part of your plan but it may well be best not to put all your eggs in one basket.

To look at an overall plan please feel free to contact me for a chat. By using BTL as part of your portfolio it does add a level of diversification - Let us help you develop a strategy at uses BTL rather than relies solely upon it.