Are Investment Properties Really the Best Long Term Option for Your Pension?

by Jonathan Adams
landlord tax

It is probably fair to say that, given a straight choice, the average Brit has more faith in investment properties than investments in the stock exchange. The phrase ‘safe as houses’, has not made its way into our everyday vocabulary without a deeply ingrained cultural belief in the security of property as an asset class.

That’s backed up by a survey conducted recently by the Office for National Statistics, which asked respondents which kind of investment they believe would provide them with the best return for their pension. 22% of respondents said they thought their workplace pension would prove to be the best investment, only 6% said their ISA and a huge 49% opted for investment properties.

However, analysis by The Telegraph published over the weekend suggests that the attractiveness of property as an investment may be on the wane in comparison to other asset classes – particularly equities. Rising house prices in comparison to rents as well as changes to the regulations around the tax regime applied to buy-to-let property is eroding the long term returns that can be expected in comparison to stock market investments. And it looks as though that is a trend that is set to continue.

In England and Wales, the average rental return landlords can expect in 2018 is 4.3%. That’s significantly down from 5.1% in 2015. In comparison, the FTSE 100 index of the 100 largest companies listed on the London Stock Exchange, is currently yielding 4.4%. In addition to returns on property becoming less competitive than stock market investments, being a landlord is also a lot more work. As well as the time commitment, owning a property let to tenants can, and often does, result in moments when unexpected large, one-off expenses can hit hard.

Also, by 2020, all rental income generated on buy to let properties will be taxable, minus a 20% allowance, and not just on the profit. Add a significant tax hit when a property is sold and the arguments for favouring property investments over alternatives such as equities become far weaker than they were as recently as a couple of years ago.

That isn’t to say that property does not remain an attractive investment opportunity, given the right property and other circumstances. There is also the attraction of its physical presence and reliability in a ‘worst case scenario’ in future financial markets. However, it is by no means the clear winner over 25 years in terms of investment returns it once was. In the best case scenario, a pension plan that included an allocation to property as well as equities would offer the best of both worlds as well as all important diversification.

This article is for information purposes only.
Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.
There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.

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