'My home is my pension'
`Bricks and mortar’ – the phrase has a ring of solidity and dependability about it.
It particularly resonates in the UK where we have long had a love affair with home ownership. So much so that many investors view property – either in terms of their own homes, or buy-to-let investments – as the best form of retirement saving and superior to any pension fund.
At Reeves we believe that pensions and property should both form part of your retirement planning. Let’s take a look at some of the strengths and weaknesses of each.
Pension - The Pros
A pension fund is an extremely tax efficient way of saving. Every time you contribute the government will reward you in the form of tax relief, depending on the rate of tax you pay. For example, if you’re a basic rate tax payer and you pay £1,000 into your scheme in one year, you will receive another £250 from the government. If you’re a higher rate tax payer, you can claim back a further £250. This immediately represents a significant return on your money, even before it’s put to work in the fund.
By law, your employer must contribute to your pension*. In addition to your own contributions and the tax relief, you effectively receive a pay rise from your employer. More free cash! *This only applies if you earn over £10k per annum or 22 years of age +
If you’re self-employed and have your own limited company – of which you’re an employee - you can pay into your pension scheme by making an employer’s contribution. This can be deducted from your profits when calculating your corporation tax bill at the end of your financial year.
When you die, your pension is sheltered from inheritance tax, so that your family or other beneficiaries will not be hit with a hefty 40% tax bill*. It’s also sheltered from Capital Gains Tax. *IHT only payable if the estate is above the nil rate band
In a pension fund you can diversify your investments across different asset classes, economic sectors and geographies which looks to minimise investment risk.
Pension - The Cons
You cannot make use of your pension until you reach the age of 55.
Pension funds charge fees. You must ensure that these are not higher than necessary, otherwise they can erode the gains you do make from your portfolio.
As with any investment, there’s an element of risk. Too many people pay money into a pension scheme and then forget about it. This is not wise. At Reeves we constantly monitor the markets and the economic outlook and advise our clients on adjustments to their portfolios in order to anticipate changes and take advantage of opportunities.
The government can change the rules on pensions and how you access them at any time.
Property - The Pros
UK property values have enjoyed phenomenal growth in recent decades. The average house price in February 2018 was £225,047, up from £57,726 in April 1990, according to the Land Registry.
Your own home also provides you with a roof over your head and you have the option of downsizing or equity release to provide a capital injection into your retirement planning.
If you have invested in a buy-to-let property, you not only benefit from capital gains but also receive regular income in the form of rent.
Property - The Cons
Property is not a liquid asset. It’s hard to turn it into cash at short notice and you have to go through the time, trouble and expense of selling it.
Buy-to-let is not as attractive as it was when the market was at its height. The Chancellor introduced an additional 3% Stamp Duty charge for second homes, making investment properties more expensive to acquire. He also reined in some of the tax reliefs available to property investors, and introduced new underwriting rules to make it harder for investors to raise the funds to finance property acquisition.
Buy-to-let calls for some experience and expertise and can be time consuming. You need a good knowledge of both local property values and the local rental market. This is to guard against paying over the odds for a property in the first place and to make sure that it’s suitable for the kinds of people looking for rented accommodation in that area. Apart from that, you need to be acquainted with all the rules, regulations and taxes that apply to renting out property. Don’t forget also: there’s the question of maintaining the property, arranging repairs, collecting rent and marketing it. There are plenty of agencies which will look after this side of things for you, but they’ll charge you a fee for doing so, which, of course, reduces your return.
Without proper planning you could have to sell your home to pay for care fees.
Property counts as part of your estate and is subject to Inheritance Tax.
At Reeves we don’t think there’s a black and white choice between a pension or property. As we’ve outlined, both have their strengths and weaknesses and you should think about a combination of the two.
Property is one of the basic asset classes and should form part of any balanced portfolio. However, there are other ways to invest in property other than by buying into the physical bricks and mortar. You can take advantage of the returns available in the property market by investing in property companies and funds through your pension scheme. This way, you can also benefit from the tax advantages of pensions without some of the drawbacks of property ownership. If you are particularly keen on property, a Reeves portfolio is flexible so that you can chose to weight investments more towards that sector.
The articles are for information only and should not be construed as advice or a recommendation. The investment strategies mentioned are examples only and may not be suitable for your particular: circumstances, tax position or objectives. Please seek independent financial advice before taking any action.
No advice should be conferred from the articles. No action should be taken without independent professional financial advice as any actions on your pension may be irrevocable and have a big impact on your income in retirement.