What is the best way to save for your retirement?
It’s not an easy question to answer; if possible at all. There are a number of options available, each one with a myriad of advantages and disadvantage all specific to you and the type of retirement you wish to have.
A recent study from the Office of National Statistics (ONS) suggests that:
- 40% of people believe that their workplace pension is the safest option
- 30% of people believe that investing in property is the safest option
With the other 30% seemingly undecided, it begs the question: “Which is better?”
In the words of bespectacled and large-collared comedian Harry Hill, there is only one way to find out: FIGHT!
In the red corner: Pensions
Let’s start with pensions; the crowd’s favourite.
Not the most exciting of fighters, but there is far more to the humble pension than meets the eye. Pensions have been around for longer than most people think, with research showing Roman centurions receiving an Annuity of land and money after active service (Source: BBC).
Whilst those planning for retirement are no longer expected to invade Britain, they do have to contribute enough money to afford their desired lifestyle.
Advantages of pensions include:
Flexible saving: Pensions offer a pay-as-you-go method of saving for retirement. You can stop and start your contributions at will, choosing to increase or decrease the amount you are paying in to suit your lifestyle.
Other people pay in: Workplace pensions benefit from three parties contributing:
- The employee
- The employer
- The Government (in the way of tax relief)
This is an extremely effective way of saving for retirement, as your own contributions are boosted significantly. To illustrate the point, for an employee earning the UK average salary of £27,195 (Source: ONS) in the 2018/19 tax year, (providing both parties contributed 3%) their monthly contribution would be as follows, providing their employer was making contributions on part of their salary:
- Employee contribution of 3%: £42.64
- Tax relief: £10.66
- Employer contribution: £53.30
This would see a contribution of £42.64 being boosted significantly to £106.60.
Tax efficiency: As with an Individual Savings Account (ISA), a pension has a tax wrapper, allowing your money to grow without incurring tax liabilities (depending on how it is accessed at retirement).
It can be inherited: If you die before the age of 75, you can pass your pension on to loved ones tax-free. If you die after the age of 75, you can still pass your pension on, but those benefitting from it will have to pay Income Tax.
Diversity: A pension allows you to invest in a broad spread of assets, which can diversify the portfolio and align with the savers attitude to risk.
Disadvantages of pensions include:
Restricted access: You can’t usually access your pension until the age of 55 (those with severe health problems may qualify for early access). This age will rise from 2028 and, linked to the State Pension Age, is expected to trail 10 years below it from then on. Most people won’t have built up enough money to retire before this age, but it means that for those that have, their options are restricted.
Lack of options if circumstance change: When you pay into a pension, you can’t take it out again until you are 55, or suffer ill-health. Should your financial circumstances change, and you need access to the money early, your hands are tied.
Complexity: Pensions are often very complicated, and people may not necessarily make the right decisions with:
- How much to pay in
- Their attitude to risk
- Which investments to hold within the pension
- When and how to access their money
In the blue corner: Buy to Let (BTL) Property
Property is arguably the livelier of the two contenders, with 49% of people believing that property is the most lucrative way to save for retirement (Source: ONS).
Property has been bought and sold since the beginning of time, and for good reason. Everybody wants a roof over their head, so the potential to make money is ever-present.
Advantages of investing in property include:
You can benefit from gearing: You can borrow money to invest in property, making it an accessible option for anybody willing to take on the risk of being able to make the repayments. However, this has disadvantages as well.
Low interest rates: You can borrow money relatively cheaply. However, interest rates are set to rise, though economists are divided on how high (and how soon) (Source: Financial Times).
It can be studied: Investing in property is arguably as much an art as a science, but those who are familiar with the market can gain an advantage over investors who are just starting out.
Disadvantages of investing in property include:
Lack of diversification: All of your eggs are in one asset class, and often, one specific region. This can be risky, as a fall in property prices will affect your whole portfolio.
No guarantees: Investing in property can be lucrative, but the bad often comes with the good. For example, if tenants don’t pay, or the property is empty, your income will cease. This may affect your ability to pay bills (including the mortgage repayments themselves).
There are also no guarantees that the property will rise in value, adding an element of risk when the time comes to sell.
Taxation: Any gains you make on the sale of a property will be liable for Capital Gains Tax (GCT). And, like a pension, any income you receive will be taxed.
It requires attention: Investing in property isn’t as labour-free as investing in a pension. Being a landlord is a time-intensive job. In many ways, it’s a business that requires constant attention: dealing with tenants, issues and everything in between.
It isn’t as profitable as it once was: The ability to offset interest payments against rent has been curtailed, and will be removed completely in place of a 20% tax credit in 2020 (Source: Gov.UK).
Borrowing: Whilst borrowing can be an advantage as it allows you to buy more property, you remain on the hook for mortgage payments, even if your tenants default, damage the property etc.
And the winner is…
…completely dependent on your personal circumstances.
There are no easy answers with saving for retirement, as everybody has a different set of goals, ambitions and dreams. One easy answer, however, lies in taking professional independent financial advice. A good adviser can help you work out what is important (and realistic) in your later years, and only then can you put a plan in place to achieve it.
For more information on saving for retirement (whether that be by pension or property), contact Sarah or Bev on 0115 9338433.