Does investment in property beat pension for retirement income?

Those saving to fund their retirement have quite an array of options available. However, the two most popular options are investments in a pension fund and loyalty to bricks and mortar by purchasing property.

Buying a piece of land to construct rental units has for long been the investment of choice for many people as a source of funds for their retirement phase. A deeply embedded belief that property investment is a sure bet, has gained considerable publicity among Ugandans who believe that it will afford them maximum returns especially in the context of retirement.

Owning a home has also traditionally been seen as a measure of success, with the phenomenal rise in house prices over recent decades enabling many people to fund their retirements by selling up or investing in buy-to-let.

For many, their income is their greatest financial asset. Thus, with average life expectancy rising, making the wrong decision about where to invest for retirement could lead to life-changing implications.

Continued gravitation by investors towards property investments and failure to explore pensions as a viable option is a huge disservice not only to the investors themselves but to the economy as a whole. Challenges arising from real estate investments have been highlighted severally but there is need for more information to be provided with hope that there will be flexibility in future investment plans.

Aside from the government tightening the tax burden on property, it is now a norm to sell a property for far less than what it was originally bought at. There is often a rude shock awaiting most Ugandans who purchase residential units or land with the hope that they will appreciate swiftly enabling them to sell at a huge profit.

Anticipated profits become elusive once the project commences as property values are never guaranteed to grow and a wide range of factors could affect its value over time. Property can also be time-consuming as it requires finding tenants, dealing with letting agents as well as arranging maintenance, repairs and insurance.

Placards warning against conmen selling land are a familiar sight in most streets. This problem is not relegated solely to cities, it has also seeped to rural areas. Many investors are often left onto worthless title deeds.

Life is highly unpredictable. Emergencies that most certainly require capital arise more often than anticipated. When one has their finances tied up in real estate, converting that into cash is relatively difficult. Yet again, the illiquidity of real estate adds to its disadvantages.

To close a real estate transition existence of several interested parties is paramount for success. Putting together needed items such as finances and paperwork further complicates the process if one is in dire need of cash. Most investors taking on a property fail to foresee the hectic process that is synonymous to real estate like obtaining permits, engaging surveyors and other legal processes.

But in contrast, pension is a pretty relaxed affair as every Ugandan citizen qualifies to be under a scheme of choice, including those in informal employment. Pension is one of the most generous tax perks with tax relief at the point of contribution, on investment income and at the point of access.

Simply put, pensions basically allow individuals to make long-term savings plan with tax relief. This means that some of the money that would have gone to the government as tax goes into a pension pot instead. Additionally, to encourage more people to save for their retirement, most employers enroll their workers into a pension scheme as well as contribute to the fund.

Unless one is unable to afford making contributions or their priority is dealing with unmanageable debt, not having a pension plan is like turning down the offer of a pay rise to be enjoyed in retirement.

When all is said and done, investing is all about distributing money in order to benefit from a decent return at some point in the future. There is no reason for property and pensions not to complement each other as part of a diverse investment portfolio. However, as retirement needs may vary per individual, it all boils down to tactfully designing retirement plans that are aligned to these needs.

The author is a pension consultant at Enwealth Financial Services Limited.

© 2016 Observer Media Ltd