Pension vs Buy-to-Let: Investing £100,000 over 20 Years
AJ Bell, one of the UK’s largest providers of online investment platforms and stockbroker services, recently carried out an analysis comparing the outcome of investing £100,000 via a pension fund and investing the same amount in buy-to-let properties over a 20 year period. Its findings may surprise would-be investors.
With regards to pensions, the analysis was based on 10 years with the pension in the accumulation phase and 10 years with it in drawdown. This was compared to an investment in a single buy-to-let property with no mortgage, as well as an investment in three buy-to-let properties where £100,000 was divided into three deposits to facilitate three 75% loan-to-value mortgages.
The analysis also assumed that tax is paid at the basic rate; a higher rate tax payer would be able to reclaim an additional 20% tax relief via their tax returns.
The research concluded that:
Buy-to-let only starts to look attractive when investors have multiple properties, all with 75% mortgages
AJ Bell also found:
- Working out the costs and income potential from buy-to-let makes pensions look simple. However, the costs are often underestimated or ignored in comparisons
- Many pension comparisons just look at the returns generated by stock market indices and ignore the positive impact of reinvested dividends that can deliver significant stock market returns
- Predicted house price growth is often distorted and overstated based on long-term historical trends, which are unlikely to be repeated
- A pension enables investment diversification, with buy-to-let all your investment is in one asset class
- On death, a pension can be passed on to beneficiaries tax-free. A buy-to-let property will form part of someone’s estate and may be subject to inheritance tax
- A direct comparison is difficult - investors need to weigh up potential capital growth and income outcomes for each individual investment
|Pension in accumulation||Pension in drawdown|
|Initial investment of £100,000||Annual income over period (pre tax)||Value of investment after 10 yrs||Future annual income (pre tax)||Value of investment in another 10 yrs|
|Buy-to-let (1 property)||£4,118||£123,095||£4,549||£156,331|
|Buy-to let (3 properties)||£7,242||£171,600||£7,844||£217,932|
|Source: AJ Bell|