The Finance

Expatriate tax and finances

Property Vs. Pension

Following the string of gloomy stories which have emerged on pension schemes in the past few years, some people have looked at investing in property as an alternative means of providing a retirement income.

So should people forget about saving in a personal pension fund and just put their faith in bricks and mortar instead? As property prices continue to rise - albeit at a slower pace this year than last - choosing bricks and mortar over a pension when it comes to planning for retirement is a popular decision. However, let us consider the full implications of each asset class.

Despite the tax relief pensions attract, they have fallen out of favour in the onshore environment in recent years and are regarded as being inflexible compared with buy-to-let, which gives the investor greater control.

People like property because it is more tangible than a pension: instead of a piece of paper listing details of your investment, you can see bricks and mortar. Property is more flexible: you can sell when you wish, assuming you can find a buyer and taking into account the tax implications.

Not too risky

The beauty of property is that you don't have to put up a lot of cash nor take on a great deal of risk. Many people invest directly via buy-to-let, producing an income in the short term, which covers the mortgage payments, and long-term capital growth. The longer time frame you have for the investment, the riskier the portfolio you can look to take on.

While property is a tantalising alternative to a pension when it comes to retirement planning, there is a danger in putting all your eggs in one basket.

This approach is never a good idea, whether you opt for a pension or property - a spread of assets is a much more sensible idea. On the other hand, nominal house prices have gone up by over 500% in the past 20 years - so surely saving into your house can't be anything other than a safe bet?

But can we really rely on our houses to fund us through retirement? The temptation to rely on bricks and mortar in old age is understandable. On the one hand, there are credit card bills and mortgage repayments squeezing monthly budgets, making it ever-more difficult to find the cash to put aside in a pension.

But don't be lulled into a false sense of security.

Investment dangers

First, housing isn't the fail-safe investment that many assume. There are dangers associated with investing in a single, undiversified asset. If you retire at a time when house prices are falling, such as in the early 1990s, there may be much less to cash in than you expect.

And it simply isn't true that housing outperforms equities over the long term. While the average annual real rate of return on property was 5.6% over 20 year periods from 1930 to 2003, the rate for equities was higher, at 6.4%.

Costly moves

If you're banking on using your house in retirement but haven't planned for the costs involved, you may be in for a nasty shock. Living off your home usually requires either downsizing, or taking out a loan against your house while you continue to live in it. Neither of these comes cheaply. Moving home can cost anywhere up to £15,000 in the south-east of England - and that doesn't include stamp duty.

Expensive loans

Taking out a loan against your home can also be expensive. Unless you have the cash flow to repay interest on a regular basis, it will roll up against your home until it's sold.

A £20,000 loan taken out today at 6% interest - not much higher than a typical conventional mortgage - will have accumulated to around £65,000 in today's prices 30 years later (assuming inflation of 2%).

Add to this the fact that any income you save into your pension is tax-free and as an expatriate receive tax free capital appreciation and income from it - but paying off your mortgage isn't - and the relative advantages of a pension become clearer stil.

In addition, pension capital can be invested in property funds via a managed portfolio, allowing you access to the gains of some of the worlds fastest growing property markets without the risk or time delays of directly investing there yourself. This pools risk with other investors and you can commit less money. Traditional property funds buy retail, commercial and industrial buildings, complexes and shopping centres in order to build up their asset base and avoid the worst fluctuations of the residential property market.

Equally, equity release or trading down can be a good source of extra retirement income for those who are happy to move to a cheaper property, or area, or see the size of their bequest reduced substantially.

None of the above should be taken to suggest that property should not form part of a broad retirement investment portfolio and can form a key part of any wealth building strategy.

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