Property vs pensions: Where should you put your money?

One of the most important decisions in life is what to do with your money. Getting it right could mean being financially comfortable forever, but getting it wrong could be disastrous.

When looking ahead to retirement, two of the main options are property and pensions. New research from the Office for National Statistics found that 44% of respondents believed property would “make the most of their money”, compared to 25% who thought an employer pension.

So which is better? Let’s take a look at some of the main considerations:

Tax

Pension Property
  • Tax relief is applied to contributions (up to the annual allowance).
  • Investments grow tax free.
  • From the age of 55, up to 25% of a pension can be 
    taken as tax-free cash.
  • Pensions are not considered part of a person’s estate 
    so are exempt from inheritance tax and can be 
    passed on tax free. If a person dies after the age of75, their beneficiary will pay income tax on withdrawals from the fund.
  • If the property is not your main residence, you could be subject to capital gains tax.
  • Rent is considered taxable income.
  • If you take money out of your pension to purchase a property, you could face a large tax bill.
  • There are assorted costs to pay, including council tax.
  • Property is held inside a person’s estate and will be liable for inheritance tax if its value exceeds the threshold.

 

Accessibility

Pension Property
  • Pensions cannot be accessed until the age of 55 (doing so earlier is known as liberation and has large tax penalties).

  • Following the new pension rules, there is no obligation to purchase an annuity and ad-hoc sums can be released from a fund.

  • If you are over 18, there is no age restriction on buying or selling property, but equity release is only available from 55.

  • To access money in property you need to sell it. This can take a long time.

  • If there is a house price crash you may not be able to sell and make a profit.

 

Cost
 

Pension Property
  • Pensions cannot be accessed until the age of 55 (doing so earlier is known as liberation and has large tax penalties).

  • Following the new pension rules, there is no obligation to purchase an annuity and ad-hoc sums can be released from a fund.

  • If you are over 18, there is no age restriction on buying or selling property, but equity release is only available from 55.

  • To access money in property you need to sell it. This can take a long time.

  • If there is a house price crash you may not be able to sell and make a profit.

 

Consistency

 

Pension Property
  • Investments carry a degree of risk, so performance is likely to vary over time.

  • Governments have made various changes, including introducing and reducing the annual and lifetime allowances.

  • If you are over 18, there is no age restriction on buying or selling  property, but equity release is only available from 55.

  • To access money in property you need to sell it. This can take a long time.

  • If there is a house price crash you may not be able to sell and make a profit.

 

Pensions are perhaps the most tax efficient way to save, and this can greatly increase the final value of the fund as contributions will have been boosted.

Property, on the other hand, has numerous costs – rental income or growth in the value will need to be large enough to recoup all of them before a profit can be made. A price crash could put you into negative equity, or you may be unable to sell and make a profit.

Choosing the most appropriate option for retirement can be difficult.

Can you afford to pick the wrong one?

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Important Information

Tax treatment depends on individual circumstances and may be subject to change in the future

The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section: https://www.portafina.co.uk/whats-new

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