Pension investing versus buy-to-let- what’s the best plan for retirement?

Martin Lewis lays out the two types of pensions

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When it comes to retirement planning there is no one-size-fits-all solution. Yet one question that often crops up is “are pensions better investments than buy-to-let?”

That said, Britons cannot seem to let residential property go, as Mr Burgeman pointed out: “We all feel we understand it – we live in it, after all!’

However, investing in a buy to let property as a replacement for a pension could be a thing of the past.

Mr Burgeman explained people must first consider the differences between the two in terms of tax advantages.

He said: “For the time being – although this might change in the future – you receive full tax relief on pension contributions, subject to certain annual limits.

“This is particularly valuable for higher rate taxpayers, where every £1 put into a pension only costs 60p.”

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The investment manager continued: “In a pension, any growth in the value of investments is free from capital gains tax.

“Any income generated in the pension is free from income tax and, if you pass away, the value of the pension can be passed on outside of your estate for inheritance tax purposes.

“By contrast, the tax rules around BTL property have changed – and not for the better.

“Automatic allowances have been replaced by allowances against money actually spent and the ability to offset mortgage interest has been changed so that gross rents are subject to income tax.”

The expert explained he has often touched upon void periods and times where redecoration and renovation may be required in a property.

But he also examined the idea of a lack of liquidity in a property, with a gap between the desire to sell it and actually receiving the cash.

He continued: “Moreover, any capital gain on the property is subject to capital gains tax at a higher rate of 28 percent rather than the basic 18 percent level.

“If this wasn’t enough, second properties attract a higher rate of stamp duty on purchase and will also form part of your estate for IHT purposes.”

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In conclusion, Mr Burgeman said he would not completely rule out buy-to-let investments.

He concluded: “As part of a balanced portfolio of estates producing income in retirement, it can be a valuable diversifier.

“However, the tax advantages of pensions are, in our opinion, compelling.”

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