Is your property your pension?


Neil Simpson is a former Personal Finance Journalist of the Year and the author of the Buy-to-Let Investor column in Financial Mail on Sunday. He is a keen property investor and writes about buy-to-let online as well as for a variety of publications including City AM.

I love getting into debates with fellow financial journalists about the pros and cons of using buy-to-lets as a pension. I’m constantly amazed at how negative most money writers are about property – and I’ve said many times that I think a lot of this is due to jealously.

My views are always pretty simple. I think that if you are an employee and you have access to a good company pension scheme you should almost always join it. If you don’t you’re likely to be missing out on the contributions your employer will make on your behalf, which is a bit like turning down a pay rise. If you are in an existing personal pension then you should probably carry on contributing because once you are in the savings habit it’s stupid to break it.

Apart from that I think property really can be a perfect alternative to a new pension. I’ve done the sums for myself and even if I put a big lump sum and then several hundred pounds a month into a traditional pension I’ll struggle to get a fund worth today’s average property price by the time I retire. And today’s average property price probably won’t look that great in 2032. Isn’t it far better to buy that average property today? Even if you don’t make a single penny in rental profit in the next 25 years you should end up with a much more valuable asset. And for the next quarter of a century you can spend the money which would have gone into your pension on other things.

Too simplistic and flippant? That’s what the pension fans always tell me. So for once I will add a serious note: One of the other things that property investors should spend their money on is decent life insurance. Life cover does normally come as standard in company and personal pensions. With a good company scheme your family can get large lump sums or an income for life if you die. Personal plans tend to offer lump sums.

Property investors who go it alone without traditional pensions should seriously consider topping up their life cover elsewhere. It’s a mistake, for example, to assume that you don’t need insurance because you are passing on a large property portfolio to your family. Inheritance tax is likely to take a large slice of this and illiquid assets like property can cause problems when all a young family really needs is cash. Most surveys show that we all massively under-estimate how much money our loved ones might need if we weren’t around – paying for childcare to do the things we do for free can be surprisingly expensive, for example. So the more ready cash there is the better if the worst happens.

The good news about life cover nowadays is that it is both cheap and easy to buy. Even the supermarkets sell it – at very keen prices – and you can get it by phone and online as well as through brokers. Premiums will depend on a variety of things like you age, sex, job and state of health. But in broad terms a 35 year old non-smoking man should be able to get around £100,000 over cover for just £10 a month. Women tend to pay even less.

Lots of price comparison sites offer instant shop-around services which are always worth using. There is a big gap between the cheapest and most expensive providers and the latter tend to be the high street banks and building societies that people often turn to first.

Experts say insurance premiums have actually been falling in recent years and non-smokers get the best bargains. If you’ve got an existing policy but have given up for at least 12 months you may be able to cut your premiums by a third by re-applying as a non-smoker. But whenever you change policy you need to make sure your new plan is in force before cancelling an old one.

Finally, life insurance can also help if you are worried that your property portfolio will trigger a big inheritance tax bill. Policies can be written in trust – just ask your insurer when you apply – which means the proceeds aren’t counted as part of your estate for tax purposes. Many people who calculate their heirs will be left with, say, a £200,000 inheritance tax charge take out £200,000 worth of life insurance in trust so the bill can be paid as quickly and painlessly as possible.