Pros and Cons of investing in property for a pension

publication date: Nov 20, 2013

What are the pros and cons of property investment compared to pensions? Following the Channel 4 Dispatches programme comparing pensions and property on Monday night, here we look at the pros and cons of property investment versus pensions.

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

Please note, even though you are looking at investing in property, you should still seek financial advice prior to doing so, especially if you are hoping it will deliver income or a lump sum in retirement, visit a broker such as
Chase De Vere who helped us put this article together.


  1. You can invest as much as you like/can afford
  2. You can gear your investment, so buy a £100k asset with a £30k investment, so a 10% increase is £10,000, whereas a 10% increase on £30k is £3,000
  3. Your age doesn’t matter
  4. You can ‘touch and feel’ your investment
  5. Can take your money ‘out’ at any time and pass on to families/third parties on death


  1. Property investment through gearing can and has bankrupted people
  2. Not all properties, on all streets, give the return you need to adequately fund your retirement
  3. Few investors accurately calculate buy to let and property investment returns correctly
  4. Inflation can wipe out property price/rental gains
  5. There are lots of rogue tenants who can withhold rent and damage your property as well as companies that over promise and under deliver when it comes to investing your money

What are the risks of property investment and how can you mitigate them?

Capital growth – nominal values can fall by 20% or more

Many pro-property investment companies are continuing to quote ‘property prices double every 10 years’. They don’t always do that. Unfortunately since the ‘buy to let’ boom from 2003 to 2007, many properties, especially flats in city centres outside of London have fallen by half – or even more in value as they were over sold in the first place.

When investing in buy to let, it’s essential to secure a 10-20% discount or buy a property you can genuinely add value to. This isn’t easy it can take 100-150 properties to find someone that is willing to cut their price this much.

Rental income – nominal values can fall by 5-20%

Despite what you hear in the news, rental incomes over the last ten years, according to ONS, have grown by just 8.4%. Inflation is just over 3% per year, so in real terms rents have fallen.

In addition, rents from 2008 to 2009 fell by some 5-20% in areas across the UK. Initiatives such as ‘Build to Rent’ will mean your property may have to compete with organisations renting 100+ properties at 80% of market rent – this could drive down your rents overnight.

Most lenders require your rent to be 125-130% above your mortgage costs. However, this doesn’t take into account falls in rental income. To make sure your rent delivers in retirement, my figures show you have to aim for 8% rental return and ideally you want to secure the property on a 50%-75% loan to value to ensure you receive net rental income. By the time you are retired, it is better to have paid off the mortgage, but then your asset is open to a loss in value if it doesn’t grow in line with inflation.

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

Interest and mortgage rates

Currently buy to let deals can be secured from 2.5%. This is great initially, but average rates from 2000 to 2007 were 5-7% - double if not triple. And before 2000, rates were 10-15%. These can cripple your buy to let investment and you financially. It also means you could end up not having any money from rental income in your retirement if you still own the properties with a mortgage.


Relying on ‘average’ rental income and capital growth to deliver a ‘pension’ isn’t wise. You need to make sure your property is bought at a discount and delivers today as well as in 15 years’ time – especially if mortgage rates return to 5% or more.

Track your current and future buy to let values and rental income so you understand whether they are rising in line with inflation – and if not, consider cashing them in and re-investing in other property or talk to a financial adviser and property tax expert. 

Bad tenants and rules and regulations

I estimate around one if five tenancies/tenants goes bad. This can mean non-payment of rent – and if you rely on this, it can mean your property is repossessed. They can also cause a huge amount of damage – including criminals creating cannabis factories.

Tax is currently 18% for 20% taxpayers, 28% for 40% and 45% taxpayers

This can change at any budget – reducing investors the capital growth returns.  

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Steps to analysing a buy to let deal

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