Private pension vs real estate

Pumpkin_King

Hello all,


I'm 31 and have saved up £55,000, squirrelled into various savings accounts. I've no pension, my employer doesn't offer one and I'm hoping to start freelancing some time in the next few years anyway. I rent my London home with my partner.

I've been strongly advised by a retired family member, whose pension plan was hit hard by the financial crisis, to invest in property instead of getting a pension. I could buy somewhere to let to others or, if I pooled with my partner's £30,000 savings, find somewhere to buy as a home for myself, here in London. The family member says that property prices, especially in London, are always rising, so property is the safest option.

On the other hand, I've just read Ramit Sethi's "I will teach you how to get rich" (which is much more sensible than the ridiculous title implies), which strongly recommends investing in a passively-managed low-fee lifestyle funds. He says people who fear investment in stocks and bonds as too risky are being irrational and that when you take a long-term perspective taking into account tax advantages, a properly diversified investment portfolio (which increasingly favours bonds as it ages) is overwhelmingly the best option. In contrast, he strongly counsels against seeing property as an investment rather than as a purchase, citing the many hidden costs involved in maintaining a property, and the potential losses through fees and taxes if you don't plan to stay in the house for more than 10 years.


Unfortunately, the book is very US-centric and I don't know whether his advice applies to London. Do the ever-rising house prices and rents of London mean that anyone who can buy should buy, because so much is lost through renting? I expect to be in London for the foreseeable future, quite possibly my whole working life. I've no particular desire to my own home but I'll do it if its the best course financially.


I know I'm not making the best use if my savings at the moment, but I'm really it sure what to do. I feel like comes down to number-crunching and I'd need to be a statistician to work out who's right. Any opinions?

atush

Your relative was probably investing int he wrong things, and not keeping an eye on their investments. My 4 pensions are doing very nicely. If you would have invested your 50K into property in 2007, it might be all gone now.

Second, your employer HAS to pay into a pension for you soon if not this year so join it.

The best property to buy, is one you live in. So look for a flat with your nest egg. Get a mtg now before you go freelance.

Pensions get tax relief, property has costs. It also has bad tenants, void periods, maintenance, etc. At least if you won the one you live in you dont' have to worry abt void periods and bad tenants.

Once you own your home, and have a pension, then save and perhaps think of property as well. To have property replace a pension, you would need 6-8 of them.

dunstonh

I've been strongly advised by a retired family member, whose pension plan was hit hard by the financial crisis, to invest in property instead of getting a pension.

Your retired family member sounds like they invested badly or more likely above their risk profile. You would expect the vast majority of people to be above the high points prior to crash. Indeed, the financial crisis was good news for long term pension investors. All those cheap investments to buy. You need periodic declines to make the most money over the long term.

I would be concerned about getting advice from someone that doesn't know about investing and lost money when most people are back in surplus. There are alarm bells with this relative that you should always look out for when they say a) property always goes up. b) hit hard during crash/financial crisis/another event.

The family member says that property prices, especially in London, are always rising, so property is the safest option.

Actually, it is a pretty high risk option and his opinion is wrong. London house prices are priced on the international market. They have become attractive due to currency fluctuations. When the fluctuations go the other way, they will become less attractive and sales will occur and that could see property fall in value.

Property is just an asset class. A bit like shares. It will go up and down in value. Historically shares outperform property over the long term but both asset types will have periods when they go down in value.

Unfortunately, the book is very US-centric

Which is important to note as US taxation and UK taxation is different. In the US the tax suits trackers. Managed funds have to pay a tax on gains within the fund. That doesnt happen in the UK. Its very difficult for managed funds to outperform in the US. In the UK it is easier.

MikeAppleton

First thing, tax relief. Paying into a pension pot (providing you are eligible) provides you with an additional 20% paid by the government. It's a feeling among many financial advisers that the reason for auto-enrollment is because the state pension is not feasible in the long term and some think it won't even be around when it comes to them retiring. A pension is guaranteed (for the most part) whereas your other investments are not. And finally you could potentially look into combining your property investments with a pension (via a SIPP for example).

It's a tricky one, if you believe that you can provide enough of an income in your old age then it's an option, just bear in mind that if you have a particular figure in mind, we don't know what our money will be worth in say 20 years. At least with a pension you can take measures to ensure your contribution remain at a level above inflation.

jamesd

Pumpkin_King wrote: »

I rent my London home with my partner. ... to invest in property instead of getting a pension. I could buy somewhere to let to others or, if I pooled with my partner's £30,000 savings, find somewhere to buy as a home for myself, here in London.

Buying a property as a home and buying a property as an investment are two very different things.

As a home, it's often true long term that buying is cheaper than renting. That can make it a good long term planning move. Shorter term, it's also true often in a range of places that you can rent a better place than you can afford to buy. So there can be a lifestyle cost to making yourself better off longer term.

Because of the nature of its market London is somewhat more likely to grow in price and at a higher rate than other parts of the country, though to varying degrees depending on the location.

With £88,000 available you should, even in London, to be able to buy a place at 75% LTV that's entirely acceptable as a home in much of London, or in some of the less inexpensive areas at lower LTV. It's not hard even with £55,000, with some 340 matches on one search site, but 85 takes you into some more costly areas at the same LTV.

Pumpkin_King wrote: »

The family member says that property prices, especially in London, are always rising, so property is the safest option.

That's not true for periods of up to say a decade but in general property is expected long term to grow in value by more than savings accounts but less than share-type investments.

Are you now or are you likely to be a higher rate taxpayer at some point? How about your partner? I'm asking because paying off a property with a pension lump sum is spectacularly efficient for higher rate tax payers or those able to use salary sacrifice pensions.

Pumpkin_King

Thank you for your replies. It seems there's nothing particularly advantageous about investing in property. So my question is simplified to: should I put my money into buying a home, a carefully-designed SIPP, or both?

I am likely to become a higher rate taxpayer in around 2 years. My partner probably will do so as well at around the same time.

atush: I work for a small company and I don't believe they have to provide pensions for several years yet. By that time I plan to be a freelancer.

grey_gym_sock

pension contributions are more effective when you're getting 40% relief on them, rather than 20%, so it might be worth holding off on them until you are.

in the meantime, you could use S&S ISAs. that should also be considered a longer-term investment (though more accessible than a pension), so it's only for money you're not about to put into a buying a home.

if you do want to buy a home, it will be easier to get a mortgage while you're employed, rather than self-employed.

if you're going to stay in london, it's quite likely to be financially advantageous. the only thing to consider is that you'll have much less cash available (after paying a deposit), and a commitment to keep paying the mortgage. so there are risks if either or both of you lose your job, or if your income falls. that's not meant to put you off, but is something to consider.

Pumpkin_King

I was actually a higher rate taxpayer for two years in the past, during which time much of my savings were built up. If I were to put a lump sum into a pension pot now, what tax relief would I get on that, since I am currently a basic rate taxpayer?

grey_gym_sock

it would be basic rate relief. it depends on the tax year in which the pension contribution is made.

Pumpkin_King

Wow, well that makes a pretty huge difference. Thanks for telling me! Doesn't seem very fair. Surely it should be down to how much you've been taxed on the income you made when you accumulated the savings. This makes me think I should concentrate on saving for a house and then, when I move into the higher tax band, put every pound that exceeds the basic-rate threshold, into a pension pot.

marathonic

I think a very simplistic way to look at it is as follows:

All property sold on the market will be sold to a homeowner as their own residence or else to an investor who intends to rent it out.

When calculating the returns, a professional investor will consider the following:

Rental Voids: Most will assume a month long empty period annually;
Tax: Most, but not all, will be higher rate tax payers;
Mortgage Interest and Fees: These are higher for a BTL mortgage than a residential mortgage;
Management Fees or Advertising Costs: This can be 10% of the rent, or more.

So, when considering whether to buy a home or rent, consider the fact that most landlords feel they can make a profit AFTER all the above. A portion of your rent will account for the above costs.

Obviously, capital appreciation/depreciation outweighs all of the above but that's something that's too difficult to anticipate. People sometimes talk about the advantage of not having to deal with maintenance when you rent but the fact of the matter is, maintenance should be taken into account in the rent that you are being charged. You'll be paying for it in the long term whether you rent or own - it's just the payments via renting will be indirect.


Another way of looking at it is that life expectancies are increasing all the time and currently stand in excess of 80 years old. At that rate, a 31 year old should probably expect to live on average 55 years more (as the expectancy will have increased by 2068).

So, as a 31 year old, you have a choice of paying a mortgage for 25 years with a house to leave to children or paying rent for 55 years with nothing to show for it.