Financial planner Taina Moran of Tilney said many become amateur landlords as part of their pension planning, using the rental income to top up their retirement earnings. Investors often favour bricks and mortar because they feel safe. She said: “Homeowners will already feel they understand the process of buying a property.” By contrast, pension and Isa rules can seem intimidating and confusing, which puts many off.
However, Moran cautions that investing in property is a major responsibility and success is not guaranteed: “As with any investment, the value of a property can fall as well as rise, and you might well receive back less than you originally paid.”
Owning a rental property is also a massive commitment. “You are in it for the long haul when you become a landlord.”
Tax charges can eat into your returns. While buy-to-let investors are eligible for the current stamp duty holiday they still have to pay the 3 percent stamp duty surcharge targeted at second home buyers. Buying a property takes months and a £250,000 property will incur a £10,000 stamp duty charge for those who complete after October 1.
Investors also face legal fees and survey costs, and arrangement fees if they need a buy-tolet mortgage.
“You need to service the mortgage even if you have a period where you have no tenants,” she added.
Letting agent fees add to the costs, as do repairs and ongoing maintenance, plus there is the hassle of finding tenants. While generating rental income is attractive, it will also incur income tax, and landlords pay capital gains tax at either 18 or 28 percent when they sell. With so much to consider, pensions start to look simple by comparison and offer generous
tax breaks, too, Moran said. Pension investors get upfront tax relief on contributions at either 20, 40 or 45 percent, depending on their tax bracket. “Pensions also grow free of income tax and capital gains tax,” she said. Pensions are now highly flexible, and savers can take lump sum withdrawals or a variable income through drawdown.
“Alternatively, you could leave your pension invested and take an income from other sources, such as an investment portfolio,” Moran said.
Unlike property, pensions are free of inheritance tax, although beneficiaries may pay income tax if you die after age 75. Moran said pensions have many advantages but one thing in common with property: “They are also a form of investment and you may get back less than you originally contributed.”
Damien Fahy, founder of MoneyToTheMasses.com, explained that Isas are also flexible with tax advantages: “Unlike a buy-to-let, investors pay no income tax and capital gains tax, although they may be liable to inheritance tax.”
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