Property a 'risky' investment for retirement pots

Property a 'risky' investment for retirement pots
Netwealth CEO Charlotte Ransom

High interest rates and low capital growth could reduce retirement property pot savings by as much as 38 per cent, research by wealth manager Netwealth has found. 

While property investment has been a favoured option for boosting cash in retirement, the research found investment in additional properties or buy-to-let was usually outperformed by pensions. 

Analysis of different values of property growth, compared with the average pension projected growth over 20 years, showed property investment could significant reducing retirement pot savings by as much as 38 per cent if clients are faced with higher interest rates and lower capital growth.

Netwealth said this scenario was likely in the current climate, given that UK inflation is rising at its fastest rate in 40 years (9.4 per cent) and the Bank of England’s new interest rate stands at 1.75 per cent, with further increases expected over the coming months.

The findings also showed that if property capital growth drops to 0 per cent, the gap between the financial returns that can be delivered by a property as opposed to a pension is even more startling.

It said this could lead to a 168 per cent difference in favour of pensions over a 20-year period.

The graph (below) provides an indicative assessment of projected growth of pension values compared to property values. Values shown assume that relevant taxes are paid to crystallise the investment.

Netwealth's chief executive Charlotte Ransom said: “Investing in property is popular as it is a solid and tangible asset that can be easily understood."

However, pensions have compelling tax advantages: tax relief when you pay in, tax-free growth and income, and accrued assets are not subject to IHT.

Ransom added: “To make the most of your retirement fund, understanding the intricacies of each asset and the interplay between them will help you to maximise the opportunities from both.

"However, 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 & mortar.” 

Moreover, as reported by FTAdviser, the Halifax House Price Index has highlighted the easing of the annual rate of house price growth, as the average UK house price fell for the first time in a year.