Pensions versus buy-to-let property

Which option is best for your retirement plans? 

Pensions and the purchase of buy-to-let property continue to be popular investment vehicles for retirement planning resulting in the age-old discussion: should I invest in property or a pension? Pension flexibilities have also resulted in many people considering withdrawing their pension to fund alternative investments, such as the purchase of buy-to-let (BTL) property, as it is often considered to be a better investment than pensions - but when the numbers are crunched this is often not the case. Recent changes in how property is dealt with, mean buy-to-let costs have increased. Investment, taxation, maximum contributions, dealing with the asset on death and a few other issues also need to be considered. Here are some of the advantages of pensions:

Investment 

Pensions are a tax-wrapper in which various asset classes can be easily purchased, held, switched and sold (usually without delay) as the client’s need/situation changes or in response to economic movement. Whereas buy-to-let property is a directly held single asset class which usually has to be sold to reshape the investment, involving finding a purchaser (or paying someone to find a purchaser) who will pay the required price at the required time.

Contributions 

Individual contributions to a pension receive tax relief at the marginal rate of the investor, albeit within contribution limits. The purchase of buy-to-let property does not receive tax relief on the initial investment, deposits to buy property are paid from taxed income and the tax paid is not reclaimable.

Pension contributions can be used to manage Child Benefit and Personal Allowance ‘tax traps’, which can result in pension contributions benefiting from an even higher effective rate of tax relief than the rate of tax payable. Buy-to-let investment cannot be used to manage tax traps.

Taxation 

Investment returns within a pension fund are free of income tax. The rent received from a buy-to-let property is taxable at the investor’s marginal rate, and landlords can no longer fully deduct mortgage interest costs from property income. 

Investment returns within a pension fund are free of Capital Gains Tax (CGT). On the sale of a buy-to-let property the profit is usually liable to CGT (assuming Private Letting Relief is not applicable), although purchase and sale costs are deductible. The rate of CGT charged on most gains (above the annual exemption) has been reduced from 28% to 20% for higher rate taxpayers and 18% to 10% for basic rate taxpayers, but the 28% and 18% rates still apply for residential properties not qualifying for Private Residence Relief. 

Pension funds (Defined Contribution schemes) can be cascaded through generations usually free of Inheritance Tax (subject to the scheme rules allowing this). Buy-to-let properties are liable to IHT as part of the deceased’s (and any subsequent owner’s) estate.

Please call me if you’d like to discuss planning your retirement.

Gary Tromans 

Independent Financial Adviser

Gary Tromans from Equitas Financial provides independent advice to individuals and businesses in your area for all financial planning needs. His 35 years of banking and financial services experience put him in a great position to provide the best individual solutions from the whole of the market.