Private pension vs real estate

grey_gym_sock

Pumpkin_King wrote: »

Surely it should be down to how much you've been taxed on the income you made when you accumulated the savings.

well, it would be difficult or arbitrary to trace which tax year savings came from.

This makes me think I should concentrate on saving for a house and then, when I move into the higher tax band, put every pound that exceeds the basic-rate threshold, into a pension pot.

sounds like a good plan.

atush

I agree. :beer:

Perelandra

grey gym sock gives good advice above.

To lower your overall tax- what you could do is to run this S&S ISA with the funds that you *would* have invested in a SIPP, and buy the same assets that you *would* have invested in. Then, when you become a HR taxpayer, switch enough value from your ISA into the SIPP each year to "postpone" the point at which you start paying 40% tax.

(Depending on how much you're talking about, there may be very little difference between the S&S ISA and "unbundled" investing- see below).

Rough examples:

Scenario 1:
Equity rises over the next 2 years by 10%.

If you place £4000 into a SIPP "now", it will be grossed up to £5,000 courtesy of the tax payer. In two years time, this will be worth £5,500.

Alternatively, if you place the £4,000 into a S&S ISA, you will be protected against any tax on capital gain and dividends whilst in that wrapper. In two years time, since you have invested in the same assets you'll have seen the same 10% growth, so it's worth £4,400. You now put this into the SIPP, where it's grossed up to the same £5,500, but you will also be eligible for a tax rebate of £1,100 if you do a tax return- assuming you are a 40% taxpayer when you pay in to the SIPP, and that you pay sufficient 40% tax to cover this.

If you invest the £4,000 outside of the ISA, you may end up paying more tax if your capital gain is greater than £10k or so, or if you receive dividends in the year in which you become a 40% taxpayer.

Scenario 2:
Equity falls by 10% over the next 2 years.

If you place £4000 into a SIPP "now", it will be grossed up to £5,000 courtesy of the tax payer. In two years time, this will be worth £4,500 (share price falls)

Alternatively, if you place the £4,000 into a S&S ISA, you will be protected against any tax dividends whilst in that wrapper. In two years time, since you have invested in the same assets you'll have seen the same 10% loss, so it's worth £3,600. You now put this into the SIPP, where it's grossed up to the same £4,500, but you will also be eligible for a tax rebate of £900 if you do a tax return- assuming you are a 40% taxpayer when you pay in to the SIPP, and that you pay sufficient 40% tax to cover this.

If you invest the £4,000 outside of the ISA, you may end up paying more tax if you receive dividends in the year in which you become a 40% taxpayer, but if you've made a capital loss on the investment you may be able to offset this against other gains (although not many people would need to do this).

NB: I'm not a financial advisor or tax accountant, so please don't take anything I've said above at face value without checking...

jamesd

Pumpkin_King wrote: »

This makes me think I should concentrate on saving for a house and then, when I move into the higher tax band, put every pound that exceeds the basic-rate threshold, into a pension pot.

Yes, that's in general a good plan.

OuterNet

As you like reading about finance, a book that really helped me when I was in your situation was Suze Orman's the laws of money, particularly the section on property.

I am very risk averse, so made more conservative decisions than you might choose.

At 30 I had £40k saved up, was renting, and in employment.

I decided to buy a flat then - now I am freelance, my income has decreased and I would not be able to get a new mortgage. Buying isn't for everyone, but if you do want to do it in the next few years, do it before you go freelance.

I have an affordable place to live and have been able to use any extra money to pay off the mortgage in advance or put into my pension.

atush

I decided to buy a flat then - now I am freelance, my income has decreased and I would not be able to get a new mortgage.

yes, this is why I already suggested buy now, before going freelance. Once you do, it will be hard to get a mtg.

If you are buying before marriage (or wont be marrying) write up a contract about who put in what etc. So if you split there won't be any arguments.

Pumpkin_King

Okay, I’ve run through some rough figures and I’m now leaning strongly towards the pension-only, no-property route. The key factors being:

1. If we purchase a home, my partner wants to live somewhere significantly nicer than what we’re willing to rent. Given this, I think we’d spend our entire working lives paying off our mortgage and, combined with repair and maintenance costs, not save anything from owning-vs-renting until we reach retirement age. This isn’t very enticing for me, because my main goal is to be able to comfortably retire as early as possible (not that I would necessarily retire early; I just want work to be a choice, rather than a necessity).

2. According to Nationwide’s stats, property prices have risen by about 2.8%, after inflation. Over a 30-year span, a diverse portfolio of tracker funds via a low-cost broker, is surely going to yield returns better than 2.8% a year, after inflation.

3. Even if I were always to be a basic rate taxpayer, the tax relief on pensions seems very attractive. Firstly, there’s the effect of compounding. Secondly, even if, as a retiree, I continued to rent in London, I would only need to draw out about half (in real terms) of what my (basic rate) income is today, to live perfectly happily. By retiring somewhere else, I can reduce my living costs even further. Therefore I will be taxed on my pension significantly less than I am taxed today. So it’s more than just a deferral of tax. Also, getting money out of property comes with costs too - either a big one-off fee to an estate agent, or continual fees involved in a managing a rental property.

4. With a SIPP, keeping my money in a pension doesn’t prevent me from enjoying the stability of property. As I get older, I can invest my SIPP into property (as advised by Rod Thomas in The Pensions Disaster), thus decoupling the value of investment from the income generated by it.

As several people have advised, I would keep several thousand out of a pension, to give me a buffer for rough times. But that’s a given whatever path I were to take.

---

Marathonic: We’re very unlikely to have children so dying without a house to pass on is not a problem.

Perelandra: Thanks for all the number-crunching! However, if I become a higher-rate taxpayer I will put all my excess income into a pension, so there’s not point deferring pension payments until then.

OuterNet: Thanks for the tip. I’ve added The Laws of Money to my wishlist.

atush: Yes, if I change my mind and do go for buying I will make sure I do so before going freelance. We’re already married so I’m assuming that would not be issue (statistically, most marriages end in Happily Ever After right?).

xylophone

my partner.

We’re already married

Has the word "spouse" gone out of fashion for posters who don't wish to reveal their gender?:)

Stochasticity

This article may be of interest to you...

http://monevator.com/10-why-houses-are-a-better-investment-than-shares/

dunstonh

Stochasticity wrote: »

This article may be of interest to you...

http://monevator.com/10-why-houses-are-a-better-investment-than-shares/

That has to be the daftest article I have seen for a while. They clearly couldnt find 10 reasons.