Pension vs Property Investment

Whether you’re looking to top up other sources of income or regard it as your livelihood, returns on your investments can assume an important role. Some people focus on building their pension pot and others may focus on property investment. Or, some may do a bit of both.

In comparing pension vs property investing, which of the two is likely to come out on top? Which is expected to deliver more attractive returns? Which carries the greater risk?

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There are some forms of insurance that can support your pension income as an investment in your family’s financial security. But our Rent Guarantee Insurance offers more immediate safeguards for the rental income you rely on from your property investment.

Not only can you protect the income from tenants who have defaulted on what they owe, but our Rent Guarantee Insurance package will also cover (up to set limits) the costs associated with any necessary legal action against your tenant.

There is little doubt that the government is a firm proponent of investing in your pension – it provides a whole raft of incentives designed to encourage this form of saving and investment.

Those incentives typically include compulsory contributions from your employer, tax-free lump sum withdrawals, tax-free growth of your savings, and generous tax relief on your contributions to your pension funds.

So much for the pros – the most significant con when comparing pension vs property investment is that you cannot access your pension savings until you reach the age of 55. And if you do access your pension early, you may be liable to pay tax on it.

There is no limit on the number of properties you may invest in given adequate funding. Moreover, the steady income stream – not to mention the likely capital appreciation you may realise when the property is sold – may prove an especially lucrative investment. Indeed, many people see property investment as an alternative form of a pension plan.

Unlike the contributions you make to your pension plan, however, there are no tax breaks or incentives for property investment. So, you might consider that the risks associated with property investment – a slump in property prices, for example – might counter the potential benefits.

Typically, investment decisions are made on the strength of two overriding factors – risk and return. The two are opposite sides of the same coin. Generally speaking, the greater the risks associated with any particular investment, the more attractive you would expect the returns.

The flip side, of course, is the safer any investment, the poorer the returns may be by comparison.

You need to think about the tax incentives for investing in your pension versus the more attractive potential returns come from the steady rental income and capital appreciation through property investments.

Pension schemes – whether defined benefit or defined contribution – are regulated by either the Pensions Regulator or the Financial Conduct Authority (FCA). Defined benefit schemes are further protected by the Pension Protection Fund (PPF) – which can step in to make compensation if an employer goes bust or if there are insufficient funds in the scheme to meet its pension payment obligations.

There is no such regulation or protection of investors in property – so pension investment may be regarded as considerably less risky than property investment.

Your comparison of pension vs property investing will consider the tax incentives for pension planning and the relatively lower risk associated with pension investments. However, while they might be safer, the returns on your pension investment may likely be lower – and you will be unable to access those funds until you are at least 55 years old.

For quicker, more accessible, and potentially more attractive returns, you might take the risk of property investment.

We strongly recommend you carry out due diligence and seek independent financial advice before making any decision as what investment option is the most appropriate for your own unique financial circumstances.

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