## The best sort of investment

Invest in a pension or invest in property? This is the question that we will attempt to provide some form of an answer:

The article assumes that you have purchased your own home with a mortgage already. You are now deciding whether to put money into your pension or to hold it back in savings to eventually purchase even more of a property when you move.

### Investment puzzle!

A investment puzzle: do you put money into a pension or hold the money back and invest more into property?

Of course the answer is that you should be trying to do both. You should be putting into a pension and saving up for the next property move. However this excercise is a purely mathematical one.

The problem is that the problem isn't so straightforward to solve. There are lots of moving variables. For example: you would need to assume a rate of growth for property prices, pension fund growth, rental incomes from property, fund charges on the pension and the respective tax situations. In order to answer the question I built a financial model with which I could test out different scenarios.

### Pension assumptions

I assumed that I would be contributing £320 per month into my pension over five years. Note that in order to compare like with like I would be looking to move property in five years time and hence the money put into my pension over that period could have been used to invest further into a bigger home when we come to move.

Additional pension assumptions include that my employer will match those contributions each month. I set a retirement date for the pension to coincide with my 55th birthday. Hence any contributions to my pension pot over the first five years will then continue to grow based on the fund rate of growth over the following 24 years.

I set the fund growth rate at a generous 5.9%, the same return that my current pension fund has achieved over the past 15 years. I set the annual management charge on the pension fund at 0.4% per annum.

In terms of taxes to consider, I assume that my marginal rate of tax is 40% hence I will make monthly tax savings today by putting into a pension. When I begin to drawdown the pension I assume that 25% is tax free and the rest is charged at my marginal tax rate of 40%.

### Property assumptions

In contrast, in the property scenario I assumed that the £320 was set aside monthly for five years and contributed to the purchase of an even pricier next home. I assumed that the rate of price growth in the London housing market was 6% as it has been historically.

Furthermore, I assumed that there would be a 20 year period of earning a net 3% rent on the property. In addition, I liquidate the property on the retirement date (in order to compare like with like) and incur 20% capital gains taxes.

### The results: property versus pension?

The results were not intuitive. Upon retirement date at the age of 55 the property scenario resulted in me having an additional £73,000 worth of property (and reinvested rent). Whereas the pension scenario resulted in £108,000 pension pot at the age of retirement and note that this was after liquidation having paid all taxes required. In addition, the pension scenario had resulted in over £7,000 tax deductions over the five years of contribution.

So, surprisingly the pension scenario was a better option for the assumptions that I input....very interesting.

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