Property ‘v’​ Pension – who wins the debate?

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Published on
2nd September 2019

Britain stands alone in its obsession with buying property – it truly is the Great British dream but is it the be all and end all that we seem to think it is?

Many people look at investing in property as the perfect and sometimes only way of saving for retirement, ignoring the opportunity that investing in a pension brings with it. But with all the tax advantages of investing in a pension, why is it that so many people ignore this route into saving for their future?

Let’s first look at property and its pros and cons. The big thing is that property is tangible, we can physically see it and therefore we trust in it. More to the point, it is easy to understand. Once you own a property it isn’t hard to manage, (in your mind, if not necessarily financially) but ask the average person to explain pensions and it is likely they will faulter. It makes sense for people to trust what they understand and the basic premise of property is to invest in a house and watch it increase in value, maybe making an additional income, by renting it out, along the way.

But the fact that property is tangible because when all is said and done, it is simply bricks and mortar, means there is potential for it to crumble right before your eyes. The upkeep costs associated with property can be high and if you find yourself in a position where you can’t meet your mortgage repayments, you run the risk of being repossessed, essentially losing all your investment.

But because property is accessible it is something to lean on if hard times fall. With property you have the option of accessing funds by either remortgaging, selling or if eligible, releasing equity. Easy right? Unfortunately, not always. Firstly you need to be in a strong financial position to afford the costs associated with selling a property or to be eligible for a remortgage. With rapidly changing mortgage regulations and a tightening of lending criteria it is getting harder to buy property in the first place or to arrange a remortgage, to release funds.

When it comes to selling, if you have a mortgage, you run the risk of being left in negative equity if house prices fall or even at worst, not being able to sell your house for what you initially bought it for. If you sell at a high profit you could be hit by Capital Gains Tax reaching up to 28%. And don’t think you can escape the tax man by keeping hold of your property. Unfortunately, you are taxed on it in death, as property constitutes part of your estate and therefore it can be hit by Inheritance Tax of up to 40%. Other tax changes have also made property investment less financially rewarding than it once was and the 2018 Budget announced further changes that will come into effect in 2020.

Despite all the pitfalls that owning a property can bring with it, us Brits still look at it as a viable option for future proofing our finances and we look at pensions with mistrust. Perhaps it shouldn’t be a surprise. With the abundance of negative stories that have affected pensions over the years, from the Robert Maxwell Mirror Group scandal to the ever changing rules surrounding them, there seems to be a constant and distinct lack of trust with pension funds.

But, if there is one thing us British love more than property, it’s a freebie and for most people pension funds are the most tax efficient place to invest for your retirement, with the government literally giving us money to add to our pension pots.

If you are a basic rate tax payer the government pays 20% of your contribution, meaning that for every 80p you contribute the government tops up by 20p. For higher rate tax payers this increases to 40%, meaning that for every 60p you contribute, the government tops it up by 40p. Furthermore, under auto-enrolment, your employer must also contribute 2%, increasing to 3% from April 2019 although some employers offer much more generous contributions, as it is also tax efficient for business owners because their contributions are usually deductible for corporation tax purposes.  On top of this, upon receipt of your pension, you get 25% of your it income tax-free and this does not contribute towards your main tax-free allowance. Furthermore, when you die, your pension pot does not constitute pasrt of your estate and therefore no inheritance tax is applied to it.

One of the fears that people have with pensions is the inability to access their money when they need it. Indeed, this is probably their biggest pit fall. At present you cannot access a pension fund until you reach age 55, increasing to 57 in 2028, which means that there is an inbuilt discipline in pension savings as anything you invest in them can only be used for future purposes.

However, there is a lot more freedom of access than there used to be. In 2015 the government introduced pension freedoms meaning that pensioners now have much greater flexibility. You can choose how you access your pension, whether that be all in one lump sum, buying an annuity, leaving it invested in the stock market and ‘drawing down’ income when you want it, or a combination of the three. Pensions are also significantly more protected than they have been in previous years.

Research suggests that the average pension fund has grown every year since auto-enrolment was introduced in 2012, with two thirds of those years seeing double-digit growth, a much stronger growth pattern than average house prices. Despite this, according to the national Office of Statistics, only 20% of non-retired people believe a pension will deliver maximum returns, compared with 49% for property.

For pension advice please contact me on 01904 464100 or rsimpson@garbutt-elliott.co.uk