Investing into property for retirement planning

By Jo Bentham16th August 2021

Building a strong retirement fund that supports your lifestyle through later life is one of many investors’ core investment goals.

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To achieve this, a pension remains one of the most tax-efficient considerations – offering a £40,000 annual allowance and incentives including up to 45% tax relief on contributions.

But in 2016, ex-Chief Economist at the Bank of England, Andy Haldane, made comments suggesting that investing into property could be more beneficial for retirement than a pension.

And as the wealthiest have been hit with significant cuts to pension tax relief in recent times – such as the pension taper, introduced in April 2016, which sees those earning a threshold income over £200,000 and an adjusted income over £240,000 have their allowance decreased – investing into property does have the potential to be an appealing supplement for experienced investors. 

With multiple methods of access to the ever-popular asset – from property bonds to buy-to-let – that can each be advantageous for different investment goals and circumstances, there is likely to be a suitable option for most experienced investors’ retirement portfolio. 

 

A variety of options for property investors

From owning properties outright for the purpose of renting, through to purchasing shares in housebuilders listed on the equities market and supporting the delivery of new-build developments via property bonds – there are numerous options available to experienced investors looking to add the favoured asset to their retirement portfolios. 

And as Savills predict an average house price growth of 9% across 2021 – with total growth by the end of 2025 forecast to be 21.5% – now could be a better time than ever to capitalise on the booming market

Whilst buy-to-let may be the first method of investment that comes to mind for some investors wanting to generate a regular income throughout retirement, others could be notably more suitable depending on their personal circumstances and preferences. 

As most landlords will likely attest, the investment comes with significant responsibilities. Both upfront and regular costs can be considerable – from the initial capital required to purchase properties, to ongoing maintenance costs. 

In addition, being a landlord is time-consuming by nature. Even for those who opt to hire lettings companies for support – which can in turn increase expenditure – the work doesn’t stop after the properties have been rented. 

For experienced investors looking for a more hands-off method of investment into the sector that has the potential to generate returns whilst they enjoy later life, purchasing shares in housebuilders or investing into fixed-term property bonds could be a more appropriate consideration. 

With buy-to-let at the hands-on end of the scale, housebuilder shares would be at the other – and property bonds can be seen to offer a middle-ground for experienced investors wanting the ability to choose and gain an insight into the specific developments their investment is supporting. 

For example, as research from Warwick Estates found that new-build properties are selling for 29% more than existing properties across the nation, with the highest premium at 53% in the North East - whilst Savills also predict house price growth will reach 23.9% by 2025 in the region - it could be a key place for property investors to consider. 

Offering attractive potential rates often between 4% and 8%, there are also opportunities to generate a regular income with property bonds. Most providers provide the option of realising returns on a quarterly basis as well as upon maturity, and as property bonds are typically fixed-term, once the term has ended, investors could choose to reinvest funds for the potential to grow their capital further.

 

You still have access to generous tax incentives with property

One of the main advantages of using a pension to plan for later life is the generous tax reliefs that they offer. But when looking to invest into property as a supplement to your pension, you still have access to tax incentives that have the potential to make property investment all the more appealing. 

It is often possible to hold property bonds within an Innovative Finance ISA (IFISA) – a product benefited by the well-known ISA wrapper, which renders all returns free from income and capital gains tax. 

The IFISA can allow experienced investors to significantly maximise their potential returns from property bonds, and this is apparent when considering that to achieve a return equivalent to 7% within the IFISA wrapper, investors paying tax at the additional-rate would need to be targeting a return of over 12% outside the wrapper. 

And for investors with non-standard pensions such as a Small Self Administered Scheme (SSAS) or Self-Invested Personal Pension (SIPP), there are also opportunities to hold property bonds whilst still receiving the usual, tax-efficient benefits of a pension.

Each of these tax-efficient investment vehicles have the potential to aid experienced investors in boosting their retirement funds, and could be particularly beneficial as changes to taxation – including the elimination of mortgage interest tax relief – have negatively impacted the profitability of buy-to-let

 

Adding property to your retirement portfolio

Whether you’re looking to purchase properties outright to rent, or invest into the provision of entire, high quality residential developments, there are opportunities to invest into the popular asset of property that have the potential to generate an attractive, regular income that can support your retirement lifestyle.. 

The most appropriate method of investment will depend on a number of factors – from the amount of initial capital you have to invest, to how involved you wish to be with the day-to-day intricacies of the investment – and it’s important to seek independent advice before making any decisions.