Why a pension beats a buy-to-let flat hands down

It used to make some sense to forget about saving for a pension and get a buy-to-let flat instead, says Merryn Somerset Webb. But not any more. You’d be mad not to take advantage of the current benefits of saving for a pension.


A buy-to-let flat no longer makes much financial sense

In one of my very first editor's letters for MoneyWeek, I wrote that it made complete sense for anyone with spare cash to forget about pensions and get a buy-to-let flat instead.

At the time, it did. The equities most people put in their pensions seemed expensive, and pensions themselves were very restricted: you could save much more in them than you can now, but you had to buy an annuity on retirement. At the same time, property was not particularly expensive and came with hordes of lovely tax advantages.

A large part of the population still think this is the correct way to look at things.

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Andy Haldane (chief economist at the Bank of England) told the Sunday Times this week that, given the structural problems in the UK housing market (he thinks there aren't enough houses), property probably still makes more sense. Until we build more houses, the high returns to property owners will just keep coming.

However, for me, the balance has shifted massively over the last 15 years. I'm not convinced about the structural shortage of homes argument (household sizes have barely budged for decades and rents haven't moved in line with house prices); property is expensive both in terms of purchase price and running costs; and the great tax benefitsof property investment are slowly disappearing (the new buy-to-let income tax policy is beginning to bite and there is talk of tax on capital gains on buy-to-let being charged as income).

At the same time there is (some) value to be found in the equity markets and pension freedom has completely changed the savings equation.

Think of the benefits of a pension today. You still get tax relief on anything you save at your marginal rate of income tax (so up to 45% tax back). You can save up to £40,000 a year. Once you hit retirement age you can take out 25% of this money (that you saved tax free) entirely tax free, and the rest you can take out as and when you like, subject to your normal rate of income tax. Then anything left over you can leave to your heirs 100% free of inheritance tax (think of this like a family trust).

And all the while you can make sure you have a fully diversified portfolio that can cost you as little as 0.75% a year if you play your cards right. All this may change (the inheritance bit in particular seems over generous, given how cash strapped the government is). But until it does it seems mad to me for everyone not to take advantage of it.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.