Private pension vs real estate

atush

xylophone wrote: »

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

i agree, it is a pain in the proverbial.

If someone says partner, I hear not married. In normal life, just a 'thing' who cares. In financial matters it can mean EVERYTHING.

Just ask Stieg Larson's Partner of 30 years who lost EVERYTHING in the region of 50-100 million because they weren't married. His father and brother who he was estranged from and never spoke to in over 20 years got the lot. Amazing. Even though she helped write the books. He died the day before he was due to sign the new will he had drawn up.

They almost threw her out of the flat they lived in (as Steig owned half) but decided not to as it might have affected public opinion and any court cases.

Stochasticity

dunstonh wrote: »

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

Which do you find contentious?

The advantage of capital gains on primary residence being free of CGT is obviously only relevant to the extent that someone would have fully utilised available ISA, pension and CGT allowances, which is probably very few people in all.

Likewise, no margin calls only applies to those spreadbetting, which is probably even fewer.

Otherwise, I think it's a good starting point for trying to understand why an awful lot of people don't think twice about 'investing' in property, yet instinctively recoil from or are deeply distrustful of investing into markets through pensions, ISAs etc that historically have provided higher returns. And therefore why people would give the OP the kind of advice they have.

Although I do think it leaves out perhaps the biggest reason: people can't work out how much they've actually invested into their house, and therefore the true base cost. Stamp duty, legal and estate agent fees, mortgage interest and other costs, buildings insurance, property maintenance, renovations, the time dedicated to DIY: these tend to get completely overlooked when people say things like "I bought this bouse for £20,000 in 1978 and now it's worth half a million".

Pumpkin_King

Xylophone: yep, spouses are so last year. It's all about confusing ambiguity now.

Stochasticity: thanks for the recommendation. It was a good article, but more about subjective anecdotes than stats, which means I can't put much weight on it. Also, I'm confident of avoiding the investor traps described by only investing in low-cost ETFs and index trackers, and re-balancing my portfolio no more than once a year.

Someone on another forum pointed out to me the limited effect of pension tax relief. So let me change my earlier statement slightly: pension tax relief would be more than just a tax deferral for me, even as a basic rate taxpayer, not because of compounding but because:
1. There's a 25% tax free lump sum.
2. I am happy to live off a smaller income as a retiree than I do now (I'd be very happy with a net income of £12,000 a year, exactly half what I get now). That means a substantially smaller amount of my money will disappear as tax every year.
3. The personal tax allowance for over-65s is substantially higher than for younger people. Therefore even if I had the same income as a pensioner as I do now, I would be paying less in tax from a pension income than I do now.

So a pension still seems to have the edge for me.

However: I can't see any disadvantage in me ignoring pensions for the time being and investing purely in self-select stocks & shares ISAs. In the future, I can always max out my annual pension allowance for a few years and shove it all in a SIPP, giving me all the tax advantages in time for retirement. It also means that, should I change my mind about property, I can go ahead and buy a house after all.

N.B. if I ever become a higher rate taxpayer, I will of course go pension-crazy immediately.

Linton

[QUOTE=Pumpkin King;60019031.....
3. The personal tax allowance for over-65s is substantially higher than for younger people. Therefore even if I had the same income as a pensioner as I do now, I would be paying less in tax from a pension income than I do now.
..
[/QUOTE]

Unfortunately that soon wont be the case - government policy is to move towards a single tax allowance by keeping the over-65 one constant whilst increasing the standard one by inflation.

marathonic

Pumpkin_King wrote: »

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.

You're ignoring leverage.

If I have £50,000 to invest for 30 years and achieve a return of 6% p/a after charges in the stock market, it'd be worth £287,000 in 2043.

If I use that £50,000 as a 20% deposit and buy a £250,000 house which grows in value by 2.8% per year, it'd be worth £572,000 by 2043.

Obviously, you have to consider the cost of rent versus the cost of mortgage and maintenance but buying, in general, should work out best when talking about such a long timeframe.

grey_gym_sock

Pumpkin_King wrote: »

2. I am happy to live off a smaller income as a retiree than I do now (I'd be very happy with a net income of £12,000 a year, exactly half what I get now). That means a substantially smaller amount of my money will disappear as tax every year.

i don't think that's completely valid ... regardless of how much you put in and take out of a pension per year, if the tax relief and tax paid are at the same rate (e.g. 20%), then it's neutral.

there is a gain, as you say, from the tax-free lump sum. there's a gain if you wouldn't otherwise be using your full personal allowance when retired (i.e. some pension is taxed at 0%) - or perhaps that's what you meant by the above. there's a gain if you get 40% relief, but only pay 20% when retired.

of course, tax rates may change, so it's only a guess what they'll be when drawing a pension.

on the monevator article, i think some ppl are misreading it. the author doesn't really think houses are a better investment than shares. its argument is more about why many ppl do better from houses than shares because they mess it up when they go into shares. and a bit about how they think they're done better from houses than they really have because they don't notice all the costs. the availability of cheap leverage is perhaps the only real advantage of houses that he brings up.

Perelandra

grey_gym_sock wrote: »

i don't think that's completely valid ... regardless of how much you put in and take out of a pension per year, if the tax relief and tax paid are at the same rate (e.g. 20%), then it's neutral.

Agreed.

Of course, if you arrange things properly, with a combination of income from pensions, ISAs, dividends and capital gains from shares, you can have quite a nice income in your retirement and not pay any tax at all (so even 20% tax payers can benefit).

atush

marathonic wrote: »

You're ignoring leverage.

If I have £50,000 to invest for 30 years and achieve a return of 6% p/a after charges in the stock market, it'd be worth £287,000 in 2043.

If I use that £50,000 as a 20% deposit and buy a £250,000 house which grows in value by 2.8% per year, it'd be worth £572,000 by 2043.

Obviously, you have to consider the cost of rent versus the cost of mortgage and maintenance but buying, in general, should work out best when talking about such a long timeframe.

your illustration doesn't cover the costs of the property over those years, esp the mtg interest on 200K. These all need to be added to base cost before profit?

elantan

Perelandra wrote: »

Agreed.

Of course, if you arrange things properly, with a combination of income from pensions, ISAs, dividends and capital gains from shares, you can have quite a nice income in your retirement and not pay any tax at all (so even 20% tax payers can benefit).

Can you give me an example of how exactly this would work?

I can understand you don't pay tax on any isa, but I would've thought that with the rest if you hit the tax barrier you would pay tax ... Or am I missing something ?

Linton

elantan wrote: »

Can you give me an example of how exactly this would work?

I can understand you don't pay tax on any isa, but I would've thought that with the rest if you hit the tax barrier you would pay tax ... Or am I missing something ?

Keep your pension below the tax free allowance. Dividends are tax free for standard rate tax payers and it shouldnt be too difficult to keep your annual realised capital gains below the CGT allowance limit.