There are a lot of important decisions to make in life. The US electorate decided to vote for Trump. People in the UK referendum decided to vote for Brexit. And every individual has to decide how to fund their retirement.
Pension or property? Property or pension?
Back in September, there was an article in The Times* that caused a furore. Outrage. Débacle.
Andy Haldane, the Bank of England’s chief economist, was asked: “What’s better for retirement – property or pension?”
He replied: “It ought to be pension, but it’s almost certainly property.”
Ros Altman, former pensions minister, branded his remarks “irresponsible.”
Haldane seems to be suggesting it’s all or nothing, but of course the decision is more complicated than that. Let’s look at the PROs and CONs of both options in turn.
Pros and cons of pensions
- If you’re in a company pension scheme, your employer will contribute to your pension. Sometimes they’ll even match-fund your payments, so doubling your contribution
- The Government offers tax relief on pension contributions
- Even with a small pension pot, expert advisors can help you diversify your investments and so reduce your risk
- Pensions growth is tax-free, and you can withdraw up to 25% tax-free after age 55
- You can control the cost of investment
- Your pension can be invested in other assets as well as commercial property – a diversified fund!
- If you die before age 75, there’s no tax due at all
- There’s no inheritance tax to pay
- The management fee is around 1-2% per year
- You control how you draw your savings
- You can’t access your money until at least age 55
- People perceive pensions as complicated
- Fewer self-employed people are contributing to a pension plan compared with ten years ago. (Source: Office for National Statistics)
Pros and cons of property
- You can use other people’s money – a mortgage – to leverage gains (or losses!)
- It’s tangible
- Any rental income you receive is taxed at your marginal rate
- Capital Gains are taxed at 18% and 28% (unless it’s your main home)
- No control of how you draw your investment – it’s restricted to the rental income or you have to sell the property (more tax)
- Inheritance tax will be payable
- You have to cover the cost of estate agents, letting agents, solicitors, surveyors, repairs, maintenance and empty periods
- There’s no employer contribution or tax relief on the purchase price
- There’s no guarantee that interest rates will stay low
- Stamp duty has gone up for investment properties, and mortgage interest tax relief is set to fall in April 2017
- Most people are unlikely to invest in a portfolio of properties. Having all their assets in one or two places could be risky – no diversification!
It’s your decision. But we think pensions have more benefits over property than Haldane admits.
What’s more, it’s not sensible to put all your eggs in one basket. Why choose one or the other when you could have both?
* Here’s the link to the original article (it’s behind a paywall so you’ll only be able to read the full article if you register):
Just for a laugh
“Which is better? There’s only one way to find out. FIGHT!”