The analysis looked at 10 years with the pension in accumulation phase and a further 10 years with the pension in drawdown. That is compared to an investment in a single buy-to-let property without a mortgage and to investing in three buy-to-let properties where the investment is divided into three deposits to facilitate three 75% loan-to-value mortgages. The analysis assumes tax is paid at the basic rate; a higher rate tax payer would be able to reclaim an additional 20% tax relief via their tax return.
The analysis shows that:
- A pension invested in the FTSE All-Share delivered a better return than a single buy-to-let property
- Buy-to-let only starts to look attractive when you have multiple properties, all with 75% mortgages
| Pension in accumulation | Pension in drawdown | |||
|---|---|---|---|---|
| Initial investment of £100,000 | Annual income over period (pre tax) | Value of investment after 10 yrs | Future annual income (pre tax) | Value of investment in another 10 yrs |
| Pension | £0 | £203,612 | £8,000 | £174,088 |
| Buy-to-let (1 property) | £4,118 | £123,095 | £4,549 | £156,331 |
| Buy-to let (3 properties) | £7,242 | £171,600 | £7,844 | £217,932 |
| Source: AJ Bell. Assumptions detailed below. | ||||
In carrying out the analysis AJ Bell found:
- Working out the costs and income potential from Buy-to-let makes pensions look simple – the costs are often underestimated or ignored in comparisons
- Many comparisons look at returns generated by stock market indices and ignore the positive impact of reinvested dividends which deliver a significant proportion of stock market returns
- House price growth is often overstated based on long term historical trends which are unlikely to be repeated
- A pension enables investment diversification, with Buy-to-Let all your investment is in one asset class
- A pension can be passed on to beneficiaries on death tax free. A buy-to-let property will form part of someone’s estate and could be subject to inheritance tax.
- A direct comparison is difficult, investors will need to weigh up the potential capital growth and income outcomes for each investment
Tom Selby, senior analyst at AJ Bell, comments:
“Many people like the idea of investing in property because it is tangible and feels easier to understand. However, our analysis shows that simply buying one buy-to-let property instead of a pension is unlikely to deliver a better outcome. Unless you are prepared to take on multiple buy-to-let properties and borrow significant amounts of money to do so, a pension is going to be the easiest and most profitable way to save for your retirement.
“You can start saving in a pension from as little as £1 per month via a direct debit. For property you need to have a deposit, probably of around £20,000 to £30,000, but most people can’t afford a deposit on their own home let alone a second property for investment purposes.
“The Government will also make contributions to your pension via generous tax breaks and if you are employed, the company you work for now has to provide a pension for you and contribute to it too.
“Buy-to-let can be a good investment if you get it right but our analysis shows that it is not the easy option that people might assume and it should not be seen as an alternative to a pension. Most people will be better off starting with a pension, take the Govt and employer contributions on offer and then consider whether Buy-to-Let would make a good addition to their retirement income plans.”
Assumptions used in comparison
Buy-to-let
House price growth matches that achieved over the past 10 years. Average UK house price in July 2006 was £170,604. In July 2016 it was £216,750 – growth of 27% - http://landregistry.data.gov.uk/app/ukhpi/explore
Gross rental yield of 6%
Pension
Annual investment growth via the pension of 5% post charges (FTSE All Share has returned 5.8% over past 10 years)
Pension withdrawal rate of £8,000 is approximately 4% per annum - aligned with a standard annuity rate
Annual investment growth in drawdown of 3% per annum post charges to reflect lower risk