Invest in property or a pension - which is best to boost your retirement?

The numbers of people searching for buy-to-let in the UK has seen an increase of more than 2.5 times from the end of March to mid-July, according to Google trends data. As the economic outlook for the Autumn continues to remain bleak and with the expectation of further job losses to come, those saving for retirement may be concerned about another stock market shock and reductions in value to their pensions and investments. Investing in property during difficult economic times is often seen as a safer option with the security of owning a physical asset.
With more people looking at buy-to-let to generate a return on their funds, we explore how investing in property compares to a pension and where to find the best buy-to-let mortgages.

The success of investing in buy-to-let property is measured in its simplest form in the rental yield achieved. Knight Frank has published average rental yields for London, Birmingham, Bristol, Leeds and Manchester since 2014. Its data shows that in January 2017, 2018 and 2019, average yields have ranged from 2.75% up to 4.75% across the regions. More recently in Q2 2020, Fleet Mortgages calculated the average rental yield across England at 5.3%.
Work out rental yield using our rental yield calculator.

In comparison, data from the Moneyfacts Personal Pension Trends Treasury Report shows that personal pension funds generated returns of 13.3% in Q2 2020 following a 15% decline in Q1 and the value of pension funds overall are still 4.4% lower than the start of last year. The last 12 full years’ results are also shown below:

Pension fund growth, 2013 to 2020

_{Source: Moneyfacts Personal Pension Trends Treasury Reports}

It is also important to remember that workplace pensions benefit from contributions from employers – effectively free money into your pension pot – and any money you contribute also has tax relief. Basic rate taxpayers get 20% tax relief, higher rate taxpayers 40% and additional rate taxpayers 45%. Those contributing through a workplace pension will usually have the money for their pension taken from their gross pay, while those paying into a personal pension may need to complete a tax rebate to receive their tax relief back. This tax relief means that every £1 saved into a pension only costs a basic rate taxpayer 80p.

Investing in a pension often comes with a management fee, usually a percentage of the value of funds held in the pension. Pension savers may also find fees apply for transactions or to use a platform, depending on the type of pension they hold. Those that are eligible can also withdraw up to 25% of their pension pot tax-free.

The costs of investing in property combine one-off charges associated with buying a buy-to-let property, for example conveyancing and legal fees, stamp duty (at the moment some properties are exempt under the stamp duty holiday ) and running costs, such as repairs and maintenance. Income tax will be applied on the earnings from a buy-to-let property if owned by an individual or corporation tax if owned by a limited company.

Read more about how to set up a limited company for buy-to-let and five-steps to becoming a buy-to-landlord.

The best limited company buy-to-let mortgage is from Monmouthshire Building Society at a rate of 2.50% discounted variable for two years, after which it increases to 4.74%. The discounted rate tracks 2.24% below the Society’s standard variable rate of 4.74%. This mortgage is available for purchase or remortgage up to 75% loan-to-value (LTV). It has an admin fee of £150 and an arrangement fee of £1,499.
The best first-time landlord buy-to-let mortgage is available from NatWest at 1.35% fixed until 30 September 2022, after which the rate increases to 4.09% variable. It is available up to 60% LTV and the fee is £995.
The best two-year fixed rate buy-to-let mortgage is available at a LTV of up to 65%. The Mortgage Works is the intermediary brand of Nationwide Building Society and its mortgages are only available through a broker. The rate is fixed until 30 September 2022 at 1.19% (4.4% APRC), and after this it increases to 4.74% variable. The fee is 2.00% of the mortgage and the minimum loan must be more than £25,001.
The best five-year fixed rate buy-to-let mortgage at 60% LTV is available from Birmingham Midshires Solutions. The rate is 1.62% fixed (3.5% APRC) until 30 September 2025, after which it reverts to 4.4% variable and the fee is £1,995. This mortgage allows for up to 10 properties held with this lender excluding residential. It is only available through a mortgage broker.