Investing in property or pension funding?

PUBLISHED: 11:26 14 November 2018 | UPDATED: 11:26 14 November 2018

VictorHuang/Getty Images/iStockphoto

VictorHuang/Getty Images/iStockphoto

© I-Wei Huang, All Rights Reserved

If you have been lucky enough to be a homeowner for any significant length of time then you would certainly have been aware of how the value of your property has increased over the years

With all the property programmes currently filling the TV schedule, you would be forgiven for thinking that buying and selling a 2nd property is the best way to generate wealth and to provide for your future.

Ultimately, residential property is one type of ‘asset class’ – investing in residential property is only one of many investment options. As financial planners, we are less concerned with the cosmetic appeal of an investment and more interested in how investing in a particular asset can provide a return on capital which can ultimately be harnessed to help an individual achieve the lifestyle they want. A key consideration has to be the tax treatment of an asset when held as an investment. Residential property, in simplistic terms, is one asset that is very difficult to invest into in a tax efficient manner.

Whilst given no airtime on TV, I would strongly argue the case for pension funding before becoming a landlord. Of course, each person’s circumstances are different and I would always encourage use of a financial planner when debating the best way to invest.

To get back to basics, a Personal Pension (or SIPP) can be described as a ‘tax wrapper’ through which a wide range of assets can be purchased (legislation does not allow residential property). In 2015 the rules around extracting money from a personal pension were fundamentally altered. This has led to pensions being seen in a completely different light to the dull, inflexible and high cost contracts of yesteryear. Added to this, are the Inheritance Tax exemptions that pensions uniquely enjoy over almost every other form of investment.

Whilst not intended to be a technical article, it is useful to remind ourselves of the significant advantages that investing in a pension enjoys over direct property purchase. Firstly, pension contributions enjoy tax relief – a higher rate tax payer effectively needs only pay-in £60 to make £100 in the pension fund and this can enable the rapid build-up of a significant pot. Secondly, assets within a pension fund are able to grow free of Capital Gains Tax – so less ‘drag’ on investment returns. Thirdly, 25% of the pension fund can be taken as tax free cash at age 55 – this can be extracted in one go or ‘stripped-out’ over a number of years thereby allowing multiple tax planning opportunities. Finally, pensions will generally fall outside an individual’s Estate for inheritance tax purposes – unused pension funds can be cascaded through generations so create an excellent opportunity to pass on wealth in a highly tax efficient manner.

Of course, there are disadvantages to pensions too but ‘pound for pound’, pensions clearly have significant tax advantages over direct property purchase. The key thing to be mindful of before you commit to purchasing a second property is to ask yourself: ‘What is the fundamental purpose of the asset?’ and ‘What return will I get on my investment after all costs and taxes?’

Once these questions have been answered you should then look to achieve this goal in the most logical way possible. Working with a financial planner will help you to decide the best route for you.

BlueSKY Chartered Financial Planners. 01189 876655;

Latest from the Berkshire Life