Are you ready to retire? While the mind may say yes the pension pot may say… not yet! The retirement fund will need to be considerable to pay for a comfortable lifestyle once it’s time to swap employment for hobbies. More and more people are now looking into alternative retirement incomes and perhaps you have already considered property investments as an option. If you are contemplating which is better, Pension Savings or Property Investments… read on as you may be surprised.
Pension Savings and Retirement
Retirement is not necessarily all about kicking back and enjoying life. For some, an inability to work rather than a lack of desire to work could determine life choices once at a certain age. The state pension was established to provide living support for those who face poverty at retirement age and would rely on their weekly pension payments to simply get-by.
Hence automatic pension enrolment was enforced on employers by the government to encourage more people to pay into pension savings from their own pre-tax earnings. To receive a modest pension income of £20,000 per year would require a £500,000 pension pot. While over an entire lifetime this may be no problem, for many who began saving later in life or are self-employed, it could be a very tall order.
Increasing uncertainty around living conditions in the future has been further fuelled by climate change, supply issues and the general costs of living. It is no surprise that despite the many advantages of either a workplace pension or a private pension, people are seeking alternative securities for their future.
Why invest in a Pension?
In the UK, if you pay into a private pension your contributions will be eligible for tax relief, simply meaning that you will get more investment for your money. With the introduction of defined contribution plans, your employer will normally match your pension contributions to double-up the amount that gets paid into your pot each year.
In this respect pensions are a very tax efficient vehicle. The longer you contribute to your pension, the bigger the pot and the higher the income it will earn you upon retirement. The drawback is that the income that the pension will generate cannot be accessed until retirement age.
The money within your pension savings will be invested in stocks, shares and bonds to generate growth for when you retire. The performance of the pension fund will therefore be dependent on the markets and how they fare over time. In times of uncertainty it is more attractive for some to have their money invested in physical assets, such as gold or property, as opposed to a share of ownership in a company.
Why invest in Property?
There are two key aspects of property investments that are attractive as part of a long term plan. The first is that property, on the whole, experiences capital growth. Despite blips in the property market where prices will fall, over time the value of property steadily increases. Certainly within the last 20+ years average house prices have doubled.
The other key benefit of investing in property is the ability to earn income alongside capital growth. While your investment property is slowly increasing in value, monthly rental income earned from the property can go towards your daily living expenses or indeed be paid into a pension or used to fund other investments. Through structuring property deals wisely it can be possible to build a retirement pot, either through capital growth or rental income, at a far quicker rate than building a pension fund.
Obviously there are expenses involved. Property income is not eligible for tax relief, in fact additional taxes will be payable such as stamp duty and of course capital gains tax. The other negative for many is market uncertainty and the fear of house prices crashing. Nobody has a crystal ball, however risks can be mitigated with the right knowledge, sadly a part of the process that some bypass at their peril.
The Third Option
There is a third option that may turn your opinion of pensions on its head. What if you paid into a pension that could be used to invest in property? Would that be the best of both worlds? A SSAS Pension (Small Self-Administered Scheme) can do just that. A SSAS pension will be set up by the directors of a company to have more control over their pension investments.
Money invested into a SSAS can be used to buy commercial property, the income from which will be paid back into the SSAS, tax free! SSAS pensions also have the ability to loan money to certain other businesses. The loan will of course need to be paid back within a timeframe, however, in this time interest accrued on the loan will be paid into the scheme to further build the pot.
If this sounds exciting to you and you want to learn more about the wealth generating vehicles that can assist with your retirement goals, why not join a free Discovery Webinar or get in touch to begin your journey. At Asset Academy we strive to open people’s eyes to the possibilities that are out there and what we have touched on in this article is just the beginning.
It is important to understand that your personal circumstances will determine which options are best for you and be dependent on how you plan to structure your retirement. Other considerations will include provisions for those who will inherit your estate, tax implications and potential care needs for example. When planning for your retirement, it is therefore always strongly advisable to seek professional advice that is tailored to your individual needs.