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What’s better for funding retirement, pensions or property?

11 April 2017 2701 Views
What’s better for funding retirement, pensions or property?

The debate between property or pensions has been discussed for many years, with the changes to mortgage interest and finance costs are treated for tax purposes coming to effect and reflections of comments from Bank of England Chief Economist, Andy Haldane late last year the debate over which is the better option for funding retirement continues.

The new changes to the tax treatment of mortgage interest and finance costs affecting landlords came into effect from April 2017, the clock started from this date for a 4-year equal phase-in to commence where mortgage interest would no longer be deductible when calculating rental profits for residential property investors (The new rules do not apply to those with property in a limited company, but does affect LLPs and partnerships.)

With these changes and other recent changes to taxation associated with property, the debate between what is the better option for funding your retirement Property or Pension continues to be a consideration for investors. But what if you could combine the two?

Indisputably, pensions have a powerful tax advantage over property, but if you’re a director or owner of a small business, the company’s assets could help you generate a bigger pension fund faster.

The boost is achieved by holding your business premises within a pension wrapper. Once those premises (including any commercial or agricultural land) are ‘owned’ by the pension, they can be leased back to the business and, significantly, rent paid by the business can go directly into your pension pot.

There are tax advantages associated with holding business premises within a pension, for example Rent paid into the pension is free of Income Tax, and there is no tax on capital gains when it is time to sell.

The tax breaks mean that business owners can build their retirement nest eggs quicker, especially if tax-relievable contributions are made from income.

Building on success

The decision to move property into a pension wrapper is validated by the combination of tax benefits and new pension freedoms; these include the availability of uncapped income from age 55 and the possibility of mitigating death taxes altogether.

Safety warning

Only a self-invested personal pension (SIPP) and a small self- administered scheme (SSAS) can hold commercial property. Many business owners will not have sufficient funds to purchase their premises outright, so they can face the challenge of borrowing money to acquire the property. The rules allow investors to borrow up to 50% of the value of their pension pot to fund the purchase.

Once everything is established, there’s also the task of making sure that rental income is invested appropriately.

Letting cash accumulate in the fund when you consider the derisory rates of interest on offer versus the longer-term potential of a typical balanced portfolio of investments is probably not the wisest move.

Remember also that property tends to be illiquid when compared to other investments. It could take months, or even years, to sell the premises at the right price – the market might be down at just the moment you want to sell.

These are just some of the reasons that directors and owners of small businesses should seek advice from a specialist before taking action.

Height restriction

One increasing challenge is the introduction of a reduced lifetime allowance of £1 million in April 2016. Anyone holding substantial wealth in a pension needs to monitor its value, as savings above £1 million will be taxed at 55% if the amount above this value is taken as a lump sum or 25% if the amount above the lifestyle allowance is taken as income.

The commercial property can hold some attractive benefits for the right type of investor, the key is ensuring you are working with a financial advisor

It is imperative in order to achieve the best outcome and mitigate unnecessary tax that investors seek advice from a financial advisor.

To see how you can become a client or receive a complimentary guide covering Wealth Management, Retirement Planning or Inheritance Tax Planning, produced by St. James’s Place Wealth Management, contact Elemi Atigolo of St. James’s Place Wealth Management on T: +44 020 7065 2904|+44 0207 065 2993| email elemi.atigolo@sjpp.co.uk

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