Pension vs property: Retirement saving option has ‘key tax advantages’

Pensions: Expert offers tips for contributions

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There are many different ways to save money or fund retirement with one being the purchase of investment property as opposed to putting the money into pension schemes. While it may not be a new option, this appears to be an increasing trend. Many purchase a single property with the intention of turning it into a rental property which is a sensible idea according to Handelsbanken Wealth & Asset Management as Britons should aim to have a “diverse income stream for their retirement”. 

However, others have made the decision to purchase multiple properties with the aim of using the several streams of rental income as their main source of funding for their retirement. 

This decision is usually made as people would like the flexibility of being able to retire earlier, which they cannot do with a pension scheme, and can allow them to have physical control over their investment rather than have it locked away.  

However, Handelsbanken Wealth & Asset Management is warning Britons that this may not be the most lucrative of routes to take.

Christine Ross, head of private office and client director at the firm, said: “Many investors will put their faith in the growth prospects of the property market and gain comfort from the fact that they can see the asset that is providing for their retirement.”

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She explained that even though property has been proven to be an “excellent long-term investment for many” the changes to tax legislation have made it a lot harder for people to turn their property income into spendable cash. 

After a four-year phasing window, in April 2020 the UK government introduced a new change that saw tax credit on mortgage interest payments replace finance costs restriction.

This meant that landlords could no longer deduct any of their mortgage interest from their rental income when calculating their taxable profit. Instead, landlords were to receive a 20 percent tax relief on mortgage interest payments.

This is less generous than the old system for higher-rate taxpayers, who effectively received 40 percent tax relief on mortgage payments.

The new rules have forced some landlords into a higher tax bracket because they need to declare the income that was used to pay the mortgage on their tax return, and if there is multiple property incomes coming in, the tax could become even more complicated without specialist advice. 

Ms Ross also highlighted the Government’s 2016 change to stamp duty charges for people buying buy-to-let properties and the current state of interest rates with the Bank of England’s current base rate sitting at 1.75 percent. 

She added: “With interest rates rising for the first time in many years investors may see their rental profits drop and they will want to ensure that they do not have any periods where they do not have a tenant in place.”

Ms Ross recommends that people should not disregard pensions as a form of income for their retirement. 

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She said: “Contributing to a pension scheme is, for most, far easier than buying an investment property as it is simple to set up and for many, it is provided by their employer.

“Some company pension schemes even offer additional matching contributions if the employee pays more than the minimum. That can be as good as a pay rise and the money will grow, tax free, in the pension scheme for many years.

“Contributions to pension schemes can generally be varied, allowing top ups when there are extra funds available and, with the exception of defined benefit, final salary, pensions, it is possible to reduce or even pause contributions if needed.”

Ms Ross explained that other than the investment cost that is deducted within the scheme, pensions “do not generally have additional charges” other than at retirement in the case of some more bespoke self-invested personal pensions (SIPPS).

One of the “key advantages”, according to Ms Ross, is the tax relief on pensions as even those who do not have earnings can contribute up to £3,600 per annum and gain tax relief. 

Tax relief is paid on a person’s pension contributions at the highest rate of income tax they pay, so basic-rate taxpayers get 20 percent pension tax relief, higher-rate 40 percent, and additional-rate taxpayers 45 percent. 

Ms Ross concluded: “Ideally savers will build up a variety of investments over time.  Pensions are accessible and benefit from generous tax relief as well as tax-free returns on the investment growth. 

“It’s vital to use all of the tax-efficient options available to create a flexible retirement plan, as well as trying to start saving as early as possible, with the earliest savings having the longest period of time to grow.

“Property will always play a key part for some investors and the right choice of investment is what suits the individual saver and their circumstances.”

Official government data revealed that the number of people saving into pensions has risen to a record high of 21.8 million.

This is an increase of over six million over the last decade with most of the growth coming from automatic workplace pensions schemes.

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