Channel 4 Dispatches: Pension vs Property, is property a pension?

publication date: Nov 19, 2013

A fascinating programme looking at whether property can deliver versus a pension and for the first time some real numbers comparing one versus the other.

Having worked with Patrick Connolly at Chase de Vere we looked at whether if you were 50 years old and invested a £30,000 lump sum into property versus a pension, which would deliver the better return.

The results are fascinating and, based on the assumptions and limitations listed below, basically the review says if it’s income you want at low risk, then a quality pension works best, if though you want flexibility, then property can deliver a better lump sum pot which can deliver an income in retirement – but by selling and reinvesting the cash, NOT from the rental income.  PLEASE READ THE LIMITATIONS AND ASSUMPTIONS before investing though, help from a financial advisor, such as Chase de Vere is required to make sure you invest wisely. 

Watch Kate's video 'Investing pensions in BTL property'


Before we should you the numbers though, we need to explain what the different scenarios we calculated are and what they are based on:-

Scenario One

Male, currently age 50, take benefits at age 65, pension growth at 4, 7% or 12% per annum, pension charges 0.6% per annum. Index linked annuity, 50% spouse’s pension.

A basic rate taxpayer earning £37,500 per annum making a £30,000 pension contribution will have a grossed up premium to £37,500 with 20% tax relief.

Scenario Two

Male earning £50,000 per annum, currently age 50, take benefits at age 65 as above. They will benefit in part from 40% tax relief and in part with 20% tax relief. They will have a grossed up premium of £39,637.50 invested for a net premium of £30,000.

Scenario Three

Male, currently age 50, invests £30,000 in a £100,000 property.

They are a basic taxpayer, but have no salary limitations

Scenario Four

Male, currently age 50, invests £30,000 in a £100,000 property.

They are a higher rate taxpayer, but have no salary limitations

Assumptions

Pension assumptions:-

The different pension performance levels are based on the following report from the FT Advisor

Pension charges at 0.6% per annum

We have assumed an annual inflation of 3%

The spouse will receive 50% of the pension income on death

Property assumptions and forecasts are based on:-

The property is bought with a 75% loan to value

The property price growth is based on Land Registry terraced house price growth from 1999 to 2013

Rents increase in line with average annual rental performance from the Office of National Statistics

“The Index of Private Housing Rental Prices” (IPHRP)

Assumed Capital Gains Tax will be applied at 18% and 28%

Assumed a letting agent will let the property on the landlord’s behalf

Warnings, Limitations and disclaimer!

The analysis is extremely general and shouldn’t be taken by any investor as ‘this applies to me’. It is essential to seek independent financial and specialist property tax advice to ensure you have the right advice for your personal circumstances, whether you choose to invest in property or pensions.

Be aware that individual residential property investment, including buy to let mortgages, are not regulated by the FCA, pensions however are regulated.

Watch Kate's video 'Investing pensions in BTL property'


So what did we find?

What can a pension deliver?

Patrick Connolly, Certified Financial Planner, Chase de Vere, Independent Financial Advisers has run the numbers to see what a £30,000 lump sum pension investment could do – according to varying rates of pension performance:-

Scenario One: Basic rate taxpayer earning £37,500 per annum

4% growth rate 7% growth rate 12% growth rate
Final lump sum £61,923 £95,099 £189,383
Annuity income (per annum) £1,848 £2,838 £5,651
Annuity income in today's terms £1,186 £1,821 £3,626

Source: Chase de Vere, Independent Financial Advisers

Scenario Two:  Higher rate taxpayer earning £50,000 per annum

4% growth rate 7% growth rate 12% growth rate
Final lump sum £64,452 £100,519 £200,178
Annuity income (per annum) £1,953 £3,000 £5,974
Annuity income in today's terms £1,253 £1,925 £3,833

Source: Chase de Vere, Independent Financial Advisers

How could property as an investment compare?

Property investment for a pension is typically buy to let which delivers two returns:

Net rental income (before tax)

Capital growth (before / after tax)

Investing £30,000 in a £100,000 property at age 50 – whatever their salary - could deliver the following:-

Whether a 20% basic rate taxpayer or 40% taxpayer could deliver the following :-

Net Rental Income @5.5% yield @8% yield
£ZERO £2,361


However the downside here is the rental income can vary according to interest rates and the capital value and rental income can fall as well as rise, making this a risky way to ‘earn’ your pension.

Also, over the last 10 years, rents have not kept up with inflation – a major issue for investors wanting to take their pension income from rental income.

However, if the property investor sold their property:-

Assuming a 20% basic rate taxpayer, assuming £10,900 CGT exemption (2013/14 rate)

Capital growth:     £102,350        Post 18% CGT tax: £83,927

Assuming a 40% higher rate taxpayer, assuming £10,900 CGT exemption (2013/14 rate)

Capital growth:     £102,350        Post 28% CGT tax: £73,692


If this lump sum was reinvested in a:-

“Balanced portfolio of equities, fixed interest, property and cash, assuming a yield of 3.4% per annum”

For the lower rate taxpayer a £83,927 lump sum = £2,856 per annum

For the higher rate taxpayer a £73,692 lump sum = £2,516 per annum

Source: Chase de Vere, Independent Financial Advisers

Patrick comments:- “If this investment grows at the rate expected, the underlying capital sum would be maintained in real terms and could be passed to future generations, however, the downside is there is investment risk and so both capital and income rates could fall.”

Alternatively, if the property investor buys a Purchase Life Annuity, providing a guaranteed level of income for life, assuming spouse's pension at 50% and indexation (as per previous annuity quotes) then:

For the lower rate taxpayer a £84,000 lump sum = £3,246 per annum

For the higher rate taxpayer a £74,000 lump sum = £3,246 per annum


The downside here - as per other annuities - is on death the residual value is usually zero.

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