How does property investment compare with banks, pensions, ISAs?
Property investment is one of the most popular investments in the UK market. When it comes to long term-growth – and if you’re funding your retirement, how does investing in property stack up against investing in a personal pension, ISA or savings bank account? At Magna Partners, we consider investment performance and explain some pros and cons.
What are the benefits and risks of property investment?
Property has been a solid choice as an investment that is most likely to grow over the years and explains the enduring popularity of property investment in the UK. House prices have beaten inflation by 3% a year since 1955. Many investors with a growing property portfolio are reaping the rewards. The demand for buy-to-let properties remains high, so property investment in this area offers enormous opportunities. Aside from the benefits of rental income, the potential increase in the value of your property over time also delivers a sizeable profit when you sell.
The combination of rental yields and capital growth means you have immediate income and severe potential for long-term gains. Investing in the right property in the right location is critical for a high rental return and investment growth. What is an excellent rental yield? Many experts agree on anything above 7%. Consider the area, the average rental yield and price growth over five years. At Magna Partners, we consider high rental yield locations such as Bradford, Sunderland, and Middlesbrough, with Liverpool, Glasgow and Leicester achieving rental yields as high as 8% compared with London and the South East around 2%
But like any financial asset, investing in property can be risky. When considering rental yields, you must also budget for other costs – maintenance, insurance, tax, repairs and additional fees. Capital growth is also a significant factor. Markets can crash, and sales can fall through. Buy-to-Let is a popular choice for property investors as a retirement income. But income from buy-to-let needs to be declared as part of your self-assessment tax return. The tax on your income is then charged per your income tax banding – 20% for basic rate taxpayers, 40% for a higher rate, and 45% for an additional rate. You may have to pay capital gains tax when you sell your investment property.
According to Entrepreneur, the UK property market is an increasingly profitable, savvy investment for income durability to high demand with great property deals in the Midlands and the North. Entrepreneur points out that because much of retail is struggling in the current climate and with many people still choosing to work from home, commercial to residential conversions are a fantastic opportunity to create new homes out of an old commercial property.
What are the advantages and disadvantages of investing in your pension?
Pensions are about to become even more generous on tax after the Chancellor announced a round of reforms. So has this given pensions a new edge? Cody Beecham, the author of the blog Personal Finance Guru, says that determining which investment is the best over time depends on many factors, such as your financial goals, tolerance to risk and how long you can leave it untouched. Figures compiled for Money Mail by wealth manager Saltus show that someone with a £20k lump sum to invest would have made the highest gains over the last two detaches if they had put it in a pension. However, in reality, it’s not that simple. If you had used your £20k to buy a £200k mortgaged buy-to-let would have gained the total value of the property price rise when you sell.
A pension is a long-term investment plan with tax relief. As you save into a pension pot, it builds up compound interest over many years – so the earlier you start, the bigger the pot. If you contribute to a workplace pension, your employer must pay at least 3% of your qualifying earnings. Opting for a self-invested personal pension (SIPP) gives you more control over the types of investment – you can even invest in commercial property via your SIPP.The biggest disadvantage is that you can’t access your pension until you’re at least 55 years old.
Another risk area is that your retirement will be invested in stocks and shares, albeit a diversified portfolio of assets – which go up and down, but the risks are spread. There is no guarantee regarding investment performance because your investments could fall in value, meaning you run out of money in retirement. Because pension contributions benefit from tax relief, the investments in your pension are sheltered from income and capital gains tax, which potentially makes a big difference to the value of your pension pot over time.
What about ISAs as a long-term investment plan?
According to Money Nest, the potential for a property investment can be highly dependent on its location. Property can be leveraged to improve your return, rented out or developed, and a sophisticated investor would look for rental yields of 8%. With the ISA rates in the UK barely reaching above 2%, not a great return and well below the rises in the cost of living across the UK. The current average rental yield in the UK is between 3-5% NET, with some areas even 10% in different parts of the country.
The Stocks & Shares ISA allowance at £20k a year tax-free is lower than the annual pension allowance. You can buy a Cash Isa – where up to £85k of your money is protected by the FSA if your ISA provider collapses. You can buy a dual-purpose ISA where you save up to £4k a year, and the government tops it by 25%. Depending on what you are saving or investing for, especially if you want to access your money sooner than retirement age, an ISA could be a good tax-efficient solution.
How do banks fare compared with property investment?
Setting aside money in a bank savings account typically helps you earn a lower return with virtually no risk. Investing in property conversely enables you to gain a higher return but with higher stakes. When you invest money in the bank, you get a low-interest rate charge and far fewer returns than any property investment. But if you need the money back within a year or so, the best bet is to use a savings account.
Savings: With a £100k pot put into a savings account with an average annual interest of 1%, your £100k will be worth £110,462 in 10 years.Buy-to-let Property Investment: purchasing a house with £100k that offers a 5% net annual yield with £600 monthly rent (with £100 monthly costs) that increases in value by 20% in 10 years will be worth (including rental profit): £100k + £20k + £60k = £180k. At Magna Partners, we deal with property investors daily, and you don’t need a giant pit of savings to invest in property. Several developments across the UK offer low purchase prices, mortgage options and other opportunities to purchase without putting 100% cash.
Which one is better for potential returns?
In recent decades, property values have shown phenomenal growth and house prices, in general, are increasing. UK house prices increased by 12.6% over the year to October 2022, with the average house price at £257k, up from £57,726 in April 1990, according to the Land Registry. Property is an excellent way to diversify, and rental income resembles an annuity. Whether looking for a single investment or want to grow an impressive portfolio, investing your money into property provides various benefits. At Magna Partners, we advise those seeking the best investment opportunities for long-term success and the least risk in areas of high-growth locations to undertake careful planning with a clear strategy. Keeping your financial plan and investment plan under review is extremely important to maximise your chance of success.
