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:

A pension invested in the FTSE All-Share delivered a more attractive return than investing in a single buy-to-let property

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
Talking about the analysis, Tom Selby, senior analyst at AJ Bell, said, 'Some people like the idea of investing in property because it's tangible and feels easier to understand. However, our analysis shows that simply buying one buy-to-let property instead of a pension is unlikely to deliver a better outcome. Unless you are prepared to take on multiple buy-to-let properties and borrow significant amounts of money to do so, a pension is going to be the easiest and most profitable way to save for your retirement.
 
'Buy-to-let can be a good investment if you get it right but our analysis shows that it's not an easy option and shouldn't be seen as an alternative to a pension. Most people will be better off starting with a pension, take the government and employer contributions, then consider whether buy-to-let will make a good addition to their retirement income plans.'
 
Take a look at the table below to see how the two compare over a 20 year period. 
 
 
 
  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
Pension £0 £203,612 £8,000 £174,088
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