Buy-to-let investing shouldn’t replace a sound pension plan

14 March 2018


“I can only last another 10 years in this job,” says my friend over dinner. “How much retirement income will I get from the state?”

I break it to him that the state pension for someone of his age (51) won’t be paid until he is 67 (maybe later) and is only a maximum of £159.55 a week, and he starts to look a bit worried.

“Will I get the full amount though?” he asks. We establish probably not, as he won’t have 35 years of national insurance contributions (NICs).

“How much will I get, then?” he asks. Based on his NICs, we work out that he might qualify for three quarters, so £117 a week. “That’s not going to be enough,” he says. “I’ll have to invest in property.”

Why property? Not a pension? “I understand property. I don’t understand pensions or the stock market,” he admits. “And it’s too late for me to learn.”

I disagree. But, a week after this conversation, I’m hardly surprised when the Office for National Statistics (ONS) releases its update on the nation’s attitudes to retirement saving today and find that almost half (49%) of the population believe property is the best way to make the most of your money when saving for retirement.

I may be unsurprised. But I am puzzled that the government’s efforts to make buy-to-let investing less attractive have done nothing to dim the attraction of property in the nation’s eyes as a whole.

By contrast, if you ask anyone who is already investing in buy-to-let property, they’ll probably tell you it’s no bed of roses.

A sustained policy assault on individual landlords includes the stamp duty surcharge of 3% on second homes, tighter required underwriting standards issued by the Prudential Regulation Authority and the phasing out of mortgage interest tax relief, which began in April 2017. The new measures have deterred some landlords from buying more properties and have led to others selling up and exiting the buy-to-let market.

In fact, new investment in buy-to-let property fell by 80% from £25 billion in 2015 to £5 billion in 2017, according to a report from the Intermediary Mortgage Lenders Association (IMLA).

The IMLA, which represents mortgage lenders that lend to consumers and businesses via brokers, suggests that some landlords will become buy-to-let mortgage prisoners. This is because the removal of mortgage interest tax relief will mean that they fail lenders’ affordability assessment, even when they are not seeking to borrow more.

Simon Heawood, chief executive at online property investment platform Bricklane, says: “As new tax returns are filled in and fixed-term mortgages come up for renewal, many landlords are recognising that the sums no longer add up.”

So where to go for a lower-hassle, more tax-efficient investment opportunity?

If you’re an employee, start with your workplace pension, with the twin benefits of tax relief on contributions and employer-matching contributions. Only 22% of people see company pensions as the best way to make the most of their money when saving for retirement, according to the ONS study. But pensions are so much easier than managing a property. And rather than being reliant on one asset and one set of tenants, you can instantly diversify your money between hundreds of investments through the investment funds that are offered in the pension.

For those, like my friend, who are self-employed and who don’t have access to a workplace pension, it’s time to consider a self-invested personal pension (Sipp) to get tax relief on your contributions. If you don’t want to lock your money away, choose a Stocks and Shares individual savings account (Isa) instead. And if you can’t be bothered to learn about the stock market and pick a fund for your Sipp or your Isa, I’ll do it for you.

The Vanguard LifeStrategy 80% Equity Fund, a member of the Moneywise First 50 Funds for beginner investors will work well for someone 10 years from retirement. It’s a one-stop fund aimed at higher-risk investors, who don’t want to think about how to put a portfolio together.

The fund has 80% exposure to globally diversified shares with the rest in globally diversified government and corporate bonds. It’s ultra-cheap with charges of 0.22% a year. Make regular monthly investments into this, sit back and watch it build up over time.