You might be making plans for when you retire. Most of the money for this important provision comes from either the stock market or the real estate market through buy-to-let.
If you had invested GBP100,000 in residential property in 1983, it would have been worth around GBP555,000 by 2006. The same amount invested in a FTSE All Share tracker would have grown to GBP1.4m over the same time period. These numbers don't include any rental income from the properties, but they do assume that all dividends were put back into the shares fund. Even with these differences in mind, shares have done much better than real estate over time.
Things have changed a lot in the past few years. Between 1996 and 2006, the return on residential property was 28% higher than the return on equity. From 2001 to 2006, the return on shares was only 11%, but the price of the average home doubled in that time.
This makes it hard to decide whether a traditional pension or a buy-to-let property is a better place to put your money.
Worryingly, even though more buy-to-let mortgages are being set up, the profits from these properties are going down. In 2001, people were pretty sure they would get a return of 10 percent on rented homes. By 2006, the average return was only 6 percent. This is also the number that is considered to be the break-even point for an investment to be worth it. Because of this, it is very important that you find the right property before you decide to go this route.
Buy-to-let landlords often think of their rental property as their retirement fund, and those who were lucky enough to be in the market a few years ago should have made some very good gains. But what about the future?
Residential renting vs. traditional pensions has always been a point of discussion. Even though stocks have done better in the long run, that doesn't mean that the same thing will always happen again.
In terms of taxes, the Revenue will help you out by giving you an extra GBP100 for every GBP60 you put into your pension. Even if you only pay the standard 22 percent, there is still a GBP22 gain for every GBP78 paid in, even if you pay the higher rate of tax, which is 40%. When it's time to start getting money from the pension plan, you can take 25% of the money in cash without having to pay taxes on it.
Gains from residential properties are taxed at 40%, but you can use your capital gains allowance and indexation to lower your tax bill. If two people own the property together, there will be two sets of allowances. It's pretty easy to borrow more money so you can buy more properties and make more money.
Anyone could be right about where the market is going. Rather than putting all your eggs in one basket, it might be best to spread them out.
The internet is the place to look for advice on both pensions and buy-to-let mortgages. You'll find all the information, advice, and quotes you need, without having to fill out too many forms.
