Pension vs. assets: The option for retirement provision with “significant tax benefits” | Personal Finance | finance

There are many different ways to save money or fund your retirement, one of which is buying investment property instead of putting the money into retirement plans. While not a new option, this seems to be a growing trend. Many are buying a single property with the intention of converting it into a rental property, which Handelsbanken Wealth & Asset Management says is a sensible idea as Britons should aim to have “diverse sources of income for their retirement”.

However, others have made the decision to purchase multiple properties with the aim of using the various rental incomes as the main source of funding for their retirement.

This decision is typically made because people want the flexibility to be able to retire earlier, which a pension scheme can’t do, and allow them to physically control their investment rather than lock it away.

However, Handelsbanken Wealth & Asset Management is warning Brits that it may not be the most lucrative route.

Christine Ross, the firm’s Head of Private Office and Client Director, said: “Many investors will take their confidence in the real estate market’s prospects for growth and be comforted by the fact that they can see the asset that will fuel their retirement. “

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She explained that although property has proven to be an “excellent long-term investment for many,” changes in tax laws have made it much more difficult for people to turn their property income into spendable money.

After a four-year phased window, the UK government introduced a new amendment in April 2020, replacing the mortgage cost cap with the tax credit on mortgage interest payments.

This meant that landlords could no longer deduct their mortgage interest from their rental income when calculating their taxable profit. Instead, landlords should get a 20 percent tax break on mortgage interest payments.

This is less generous than the old system for higher taxpayers, who effectively received a 40 percent tax break on mortgage payments.


She said: “Contributing to a pension scheme is much easier for most than buying an investment property as it is easy to set up and for many it is provided by their employer.

“Some company pension schemes even offer additional matching contributions if the employee pays more than the minimum. This can be as good as a salary increase and the money grows tax-free over many years in the pension scheme.

“Contributions to pension schemes can generally be varied, allowing top-ups when additional funds are available, and with the exception of benefit plans, final salaries and pensions, it is possible to reduce or even suspend contributions if necessary.”

Ms Ross explained that apart from the investment costs deducted under the scheme, pensions “generally have no additional costs” except at retirement in the case of some Tailored Self-Invested Personal Pensions (SIPPS).

One of the “key benefits,” according to Ms Ross, is the tax break on pensions, as even those with no income can put in up to £3,600 a year and get tax breaks.

Tax credits are paid on an individual’s pension contributions at the highest income tax rate that they have paid, so that base rate taxpayers receive a 20 percent pension tax credit, higher rate taxpayers receive 40 percent, and surcharge taxpayers receive 45 percent.

Ms Ross concluded: “Ideally, savers build a variety of investments over time. Annuities are accessible and benefit from generous tax breaks as well as tax-free returns on investment growth.

“It’s important to use all available tax-efficient options to create a flexible retirement plan and try to start saving as early as possible, with the earliest savings having the longest time to grow.

“Real estate will always be a key asset for some investors and the right investment choice is one that suits the individual saver and their circumstances.”

Official government data shows the number of people saving for retirement has risen to a record high of 21.8 million.

This is an increase of over six million over the past decade, with most of the growth coming from automated occupational pension schemes.

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