Should I buy an investment property or put all of my spare money into a pension? This is a question that, over the past few decades at least, has troubled many an individual, but which will be better when it comes to your retirement?
For people who ask this question, the truth is that investment properties should be seen as a type of pension. Investing in one type of asset, such as UK residential property, shares, foreign property or even art, cigars and classic cars, can leave you vulnerable to shifts in the market that can reduce the value of the investment. Having a balanced portfolio that includes assets in a number of classes is the safest way to plan, and investment property is often a good place to start.
Property
In the UK, house price increases over the past 20 years have been around the 500% mark, which is a tremendous level of growth. In the UK, this growth has slowed down a lot in the past couple of years, though many foreign markets are just starting to develop and it looks like now could be a great time to start building up the retirement fund with some key overseas investment property.
In certain places in eastern Europe, the Caribbean and Asia, the growth in property values is just taking off and as many of these economies do not suffer from the 'boom and bust' issues of the West, it can be argued that the investments are a lot safer in the long-term.
One of the main reasons why people choose investment property over traditional pensions in that pension plans in the UK can be complicated and inflexible. Investment properties are a physical asset and always hold a certain level of value, which can be realised simply by selling the property. Alternatively, the property can be handed down to family when you die - something that cannot happen with a typical pension.
Whilst there are often tax advantages to be had, the returns from pensions have recently been a lot lower than many investors had set their hopes on. One way of tying in investment property and pensions closer, to share some of the advantages, is to use a Self Invested Personal Pension (SIPP). Certain asset types, including UK commercial property and some overseas properties, can be put into a personal pension plan, giving the tax advantages of a pension and making the overall pot less susceptible to the fluctuations of the stock market. Putting property into a SIPP does have its drawbacks, such as greater administration costs and a more drawn out sales process.
One key thing to remember with investment properties is the time needed to see a strong return. An investment property aims to cover its costs with the rental income, so mortgage payments, insurance, maintenance and professional services are all paid for by the tenants, hopefully with something left over for the investor. Even if the property just covers its costs, the investor can hope to enjoy long-term capital growth, in the increased value of the property. Most property investors know that it is a long-term game - that's why the average UK investor is believed to hold onto their property for 15 years.
So long as you do your research and take the time to learn the pitfalls, investing in property can be relatively low risk and can give an investor greater control over the performance of the investment. As a part of a planned and balanced approach to retirement, with other types of investments, investment property remains a sensible way to prepare for your later years.
Is Investment Property a Safer Bet for Your Retirement?
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