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Why it’s time to ditch buy-to-let

Why investing in a pension instead of buy-to-let could leave you £21,901 richer
Why investing in a pension instead of buy-to-let could leave you £21,901 richer

Deciding to invest in property instead of a pension could cost you as much as £21,901 in missed returns, new analysis has suggested.

Property prices have started to stall after months of record-breaking rises. This coupled with the removal of tax reliefs on mortgage interest is expected to make buy-to-let investing far less profitable in the coming years.

Financial adviser Netwealth compared what could happen to £55,000 invested into a pension or into a buy-to-let property.

After 20 years, the pension would be worth £170,254 – assuming 5pc annual returns after fees – compared to £148,353 from the property investment, including capital growth and rental income. In total, the pension returned 210pc over two decades, 34 percentage points more than property, according to the analysis.

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The research assumes house prices will only rise on average by 2pc a year for the next 20 years. However, if house prices rise at 5pc – the average over the past 20 years – property would far outperform the pension.

Charlotte Ransom, chief executive of Netwealth, said stock market slumps have led many savers to look for alternative ways of funding their retirement.

“Investing in property is popular as it is a solid and tangible asset that can be easily understood, but we should always be careful of putting all our eggs into one basket, especially if the basket is starting to show cracks,” she said.

She said there are downsides to investing in pensions – including caps on contributions and a block on accessing cash before age 55.

“While you can sell a property whenever you wish, it might be impractical to do so quickly and for the right price,” she said.

“In the current climate, it looks likely that investing in pensions could prove the safer option, and we would therefore advise for people to consider alternative ways of gaining returns in an economically viable way beyond purchasing bricks and mortar,” she added.

The housing market has been going through a historic boom in prices, driven by pent-up demand caused by the pandemic lockdown and a stamp duty cut. But growth has since stalled.

The average house price grew 0.1pc in value over the past month, figures from Halifax bank have shown, while the annual rate of growth slowed from 12.5pc to 11.8pc between June and July.

Some forecasters are now predicting price falls of as much as 10pc over the next year.

At the same time, mortgage rates are climbing, cutting into the return from property. Netwealth's research assumes house prices will rise by an average of 2pc a year, a mortgage rate of 2.5pc (although in reality buy-to-let rates are likely to be far higher) and that rental yields are 4.4pc, the current UK average.

It also takes into account stamp duty, letting fees, capital gains tax and income tax for a higher-rate 40pc payer.

Ed Monk, a director at Fidelity International, said it was difficult to predict returns on property investments but agreed pensions were a safer option.

“Assessing the risk of property investment is always uncertain because your return is specific to the one buy-to-let property you buy, and not the property market in general,” he said. “It depends on the property itself and the area it is located.

“If you suffer a problem with the property or the surrounding area becomes less desirable, your return will be affected.”

“Unforeseen costs of property ownership can wipe out your gains. That might be tenants who refuse to pay, or move out, emergency maintenance or structural problems.”

Mr Monk said it is easier to mitigate the risks of shares by buying a stake in a range of companies in a diversified portfolio. If some companies fail, the costs can usually be absorbed by others that are performing well.

“Both types of investment are impacted by tax, but their treatment now and in the future is likely to be very different,” he said.

“Tax rules can change, but there are reasons for the government to continue to encourage us to save for our retirement via tax relief.

“With property investment the opposite is true and successive governments’ policies have made it harder to keep the gains from buy-to-let.”