It’s not the first time that pensions and property have been mentioned in the same breath, but for some time now both topics have been filling the columns of our news pages from top to bottom. The big debate is whether people should take advantage of the new pension freedoms and use the money to invest in buy-to-let property.

Sure, property is great, and right now yields are attractive and values are on the up. Certain ways of investing in property will give you a great return on your money and a healthy retirement income provided you know what you are doing. But, whether you’re able to access your pension pot or not, you should not rush into investing in rental property.

Property can, and should in many cases, form part of your investment portfolio but I would never recommend to anyone that all of their money is invested in property. It should only be part of what you do as you will find yourself needing money at different speeds for different reasons throughout different stages of your life – this is particularly the case in retirement.

Whatever you decide, carrying out thorough research and obtaining relevant advice is key to knowing whether investing in property would be the right choice for you.

However, if you’re seriously considering using money from your pension to invest in property, you should consider the following:

The time it takes to build and manage a property portfolio - If you’re nearer 55, you may still be happy to work and could use the money to start a business in property. However, if you’re 70, this might not be the right choice for you because property is an active investment, especially in the beginning. Getting a letting agent to manage your portfolio is always an option, but comes at a cost and even then, the overall responsibility still lies with you.

The illiquidity of property – Property is a largely illiquid asset and so people should have a pension portfolio that allows them to respond fast, medium and slow where accessing cash is concerned. Releasing equity from a property by remortgaging or selling it can take time and you could experience unfavourable market conditions if you’re in a position where you desperately need the money.

The uncertainty of returns - Property investment is very much a long-term strategy and no one should rely on the capital growth potential. And, while buy-to-let property can be a great vehicle for providing a retirement income, the level of such depends on the type of buy-to-let property, the location and the structure of your business. Landlords need to account for broken boilers, unexpected void periods and even market fluctuations, so maximising rental income potential is crucial. For example, Houses in Multiple Occupation (HMOs) can generate up to three times as much rental income as a standard buy-to-let which could in turn provide a buffer against any costs.

The segment of the market you want to be in – Some political parties are pledging to help first time buyers (FTBs) get onto the property ladder. It is therefore very likely that new landlords and FTBs could be competing for the same type of property – 2 bed flats, apartments and houses for example. No one wants to see another ballooning market and overinflated prices so you should look at other micro-markets and niches. There are areas of the property market that do not compete with FTBs which are lucrative.

The costs - In addition to the costs involved in purchasing and, in certain circumstances, refurbishing buy-to-let property, there can be a considerable amount of ongoing running costs – ground rents, maintenance fees, repairs and mortgage interest payments – which could make the investment less attractive.

The tax – Only 25% of your pension pot can be withdrawn tax-free, so you not only have to consider the impact of taking out more, but also the other tax implications associated with investing in buy-to-let property. You could pay income tax on your rental income, you could pay capital gains tax if you intend to sell the property and live off the proceeds of the sale and your family could pay inheritance tax after you’ve gone – a big factor if intergenerational wealth is important to you.

There is no doubt that bricks and mortar can be an attractive investment option and buy-to-let has provided the best returns over the past 18 years compared to all other mainstream asset classes. It can not only provide asset-based security, a generous monthly income and a legacy to pass on to your family, but also a better work life balance if you’re intending to build a portfolio of any substantial size. So, if property can form part of a balanced portfolio – and that balance will vary from one person to the next - then you could be setting yourself up for a very comfortable retirement.

Before investing your pension pot, make sure you seek advice. Read my blog 'Getting advice about where to invest your pension pot.'

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