An £850,000 pension could be provided from the cost of buying an average house, according to calculations from investment firm Architas, pointing out bricks and mortar are not the best retirement planning.
Pensions could produce 24 per cent more income than a property, according to the fund managers’ figures.
Over the weekend, Andy Haldane, economist at the Bank of England told the Sunday Times he would rather invest in a property rather than put money into a pension scheme.
At that time, Tom McPhail, head of retirement policy at Hargreaves Lansdown, criticised these comments, and listed a number of reasons why pensions are a good way to save for retirement including the fact the government tops up your saving with tax relief.
In the second quarter of 2016, an average house in the UK cost £204,238, according to data from Nationwide.
According to Architas’ calculations, which take into account the costs of purchasing the property, a 40 per cent tax-payer could have a pension pot of £853,698 after 25 years.
This would be assuming 5 per cent per annum return, if they invested the lump sum, and made regular annual contributions matching the mortgage costs of buying an average property.
If the value of the property also grew by 5 per cent each year it would only be worth £692,252 after 25 years.
However, if the above pension pot generated 4 per cent income after costs it would produce an annual income of £34,148 compared to £27,690 from the property - just over 24 per cent more.
Both sources of income would be subject to income tax at the individual’s marginal rate of tax, although pension investors could take a 25 per cent tax free lump sum.
Adrian Lowcock, investment director at Architas said there are a number of considerations to take into account when buying a property.
He said buying a house will require an initial cost of thousands of pounds, whereas a pension can be started for as little as £50 a month, meaning you can start your retirement planning earlier.
Alongside this, in a pension you can choose to invest in a wide range of assets from equities to bonds as well as property ensuring you don’t hold your money in just one asset.
Mr Lowcock added property is illiquid, it cannot be sold quickly and many investments inside a pension are more liquid and often easily tradeable.
“The idea of using a property as an alternative to a pension has appealed to many in recent years as property prices have continued to rise. Rising prices have lead investors to think borrowing to invest in property is relatively low risk, it is not,” he said.,
“Borrowing money to invest is particularly risky as if the investment falls in value you still owe the bank the original value of the loan.
“As property becomes increasingly expensive and valuations rise so do the risks. Investors should be wary of history repeating itself, especially as people’s income has not kept pace with property prices. Nothing goes up forever.”
ruth.gillbe@ft.com
