Beware property over pensions

Tax efficiency of pensions can save you thousands.

Cobbled Street

Portafina, one of the UK’s leading retirement specialists, recommends caution to people pinning their retirement hopes on property. House prices can fall sharply and buy-to-let carries its own risks, but the tax benefits of pensions can provide significant value.

Figures from the Office for National Statistics show that 44% of people consider property as the place to maximise returns for retirement, compared to just 25% who believe a pension is the best vehicle.

There is an appeal of capital growth and the potential tenant income with property, but the reality is there are multiple costs to consider that can significantly reduce, or eradicate, profits. These include stamp duty, council tax, maintenance, solicitor and agency fees, while landlords also need to consider void periods, repairs and management fees. Property is also illiquid, so the money cannot be accessed until it is sold, at which point capital gains tax may be owed.

In comparison, contributions into a pension receive tax relief at the saver’s marginal rate of income tax. The money then benefits from tax-free growth, increasing the power of compound interest, and up to 25% can be withdrawn tax free from the age of 55. Pensions are also held outside of an individual’s estate and can be passed to a beneficiary free of tax.

Jamie Smith-Thompson, Portafina’s managing director, says: “It’s often said that you can’t go wrong with property, but tell that to the people who lost out in the recession. Even if you believe property prices will bounce back after a crash, it can take a long time to do so and the intervening years could be extremely painful. What happens if you need to release the money when prices are lower than you are comfortable with? Property can be a strong part of a diversified portfolio, but it is a risky strategy to put all your eggs in one basket.

”The thing to remember is that property is always going to have ongoing costs, but saving consistently into a pension gives you the benefit of long-term growth, and the tax efficiency alone can mean thousands more pounds in your pocket.”

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