Matthew Newton Wealth Management Ltd

Senior Partner Practice of St. James's Place Wealth Management


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A very British dilemma

15 September 2016

Is the nation’s fixation with property ownership overlooking other, more tax-efficient ways to fund retirement?

Recent comments from  Bank of England chief economist, Andy Haldane, have reignited the debate over which is the better option for funding retirement: pensions or property?

Haldane’s  stated  preference for property has attracted criticism from some experts, including recently departed pensions minister, Ros Altmann who described his comments as ‘irresponsible’.

“It ought to be pension but it’s almost certainly property,” Haldane replied when asked what he thought was the best way to save for retirement.

“As long as we continue not to build anything like as many houses in this country as we need to meet demand, we will see what we’ve had for the better part of a generation, which is house prices relentlessly heading north. I would quite like the day to come when that isn’t the case, but we’ve got a lot of catching up to do,” said Haldane.

Generation rent

Years of low interest rates have greatly benefitted a generation who could afford to borrow, while soaring house prices and tighter lending criteria have locked out young aspiring buyers, forcing them to rent. This has fuelled an appetite for bricks and mortar and buy-to-let as an alternative to pensions.

“We’re obsessed with property in this country - perhaps more than anywhere else in the world,” says Ian Price, Divisional Director at St. James’s Place.

In some parts of the country, yields have averaged more than 5% over the last five years1, but while property can look attractive, Price says that there can be significant drawbacks.

“My generation has benefited greatly from a housing boom, and it’s a source of huge wealth for retirees, yet we can’t assume that yields and values will keep rising,” he says.

Many amateur landlords can walk into pitfalls they weren’t expecting, including problem tenants, maintenance charges, and unexpected tax bills.

“You pay tax on any profit you make from renting out a property, stamp duty is 3% more than on a main home, and the value of any property you own will be included in the value of your estate if you die,” says Price.

“Furthermore, Capital Gains Tax could eat away at the profits on the sale of the property, and there could be times when it is vacant and you’re not generating any income,” he adds.

Meanwhile, the government is attempting to make buy-to-let less lucrative by introducing tax changes starting next year, which by 2020 will remove landlords’ ability to deduct mortgage interest from their rental income before calculating their tax bill.

Pension attention

“I’m not saying that buy-to-let is necessarily a bad idea, it’s just that investing money in a pension is generally a better option for most people - it doesn’t attract the same tax penalties apart from Income Tax when benefits are taken over and above the tax-free lump sum,” says Price.

But perhaps the biggest attraction of pensions is tax relief. You can get tax relief on anything you save into a pension at your highest marginal rate of Income Tax.

“The government basically tops up pension contributions by at least 20%. If you pay higher rates of Income Tax you can claim another 20% or 25% via your tax return,” adds Price.

You can put up to £40,000 into a pension each year; once you reach the age of 55 you can get your money back, including a quarter of it tax-free. The rest of the pension will be taxed at your marginal rate.

Price says that people might start to look at other assets including property if they expect to see the total value of their pension fund exceed the ‘lifetime allowance’ of £1 million. This is the point beyond which pension benefits are taxed at more punitive rates, and the juncture at which property might provide a more tax-efficient top up to retirement income, but then only for those willing to accept the risks and challenges involved. “If there’s one time in your life to take advice it is at retirement, to make sure you understand what options are available and what are most appropriate for you,” he adds.


The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up.  You may get back less than you invested.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances

1 Rental prices extracted from Zoopla for the time period 1/1/2015 to 18/02/2016.


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