Retire Rich with Property Pensions, ISAs and REITs
By Nick Braun PhD
One thing you should consider every year is putting some money in a self-invested personal pension (SIPP). Far from being boring, pensions are one of the most powerful weapons in your financial armoury. Why? Because they entitle you to free cash from the taxman... and lots of it.
If you contribute £780 to a SIPP the taxman will top that up with an extra £220. If you’re a 40% taxpayer you can also claim a refund of £180 when you submit your tax return. All in all you will end up with £1,000 worth of investments that have personally cost you just £600. These investments are then allowed to grow completely tax free.
Taken together these two tax breaks are extremely powerful. You could easily end up with twice as much income as someone who invests outside a pension. In the best case scenario you could end up with almost 150% more income when you retire.
And for those interested in property investing there’s loads of choice. The Government lost a lot of trust when it banned residential property from pensions at the 11 th hour but the new rules are pretty permissive. You can still invest in bricks and mortar commercial property, REITs, property unit trusts and all sorts of niche funds and syndicates.
We’re starting to see all sorts of interesting offerings for SIPP investors, including residential funds that invest in upmarket London homes and overseas funds that buy shopping centres in places like Prague. You can buy of all of these investments at a 40% discount through your pension.
Property funds have lots of non-tax benefits too. Funds such as REITs and property unit trusts are great entry-level investments, providing you with exposure to dozens of high quality properties for an initial investment of £1,000 or less.
The one problem with saving through a pension is you can only get your hands on your money when you reach age 55. Even then there are onerous restrictions on how much can be withdrawn.
For investors who prefer more flexibility there’s always ISAs. These are the most flexible tax shelters of all because your investment returns are tax free whether you invest for one month or one decade. You can leave your capital invested and withdraw income tax free at any time or cash-in part of the investment and withdraw profits as a tax-free lump sum.
Your property choices are slightly more restricted in an ISA – essentially REITs, quoted property investment companies and unit trusts – but the choice is growing every day. For example, we’re seeing the emergence of property unit trusts that invest directly in overseas bricks and mortar (not just property shares, as is currently the case) and the number of REITs will grow steadily over time.
You may think ISAs aren’t very exciting investments but did you know that a property ISA investor could easily end up with 50% more money than a direct investor who uses gearing to buy a far bigger chunk of property?
A property ISA investor could never beat a highly geared bricks and mortar investor when property is experiencing double digit capital growth. However, when growth rates slow down to 5% to 7% it become a lot more attractive to hold onto your rental income and reinvest it instead of using it to pay interest on borrowings.
Property ISA investors don’t have borrowings so they can reinvest all their income. What’s more it’s tax free and this can make a big difference at the end of the day.
Nick Braun is the founder of Taxcafe.co.uk and the author of Tax-Free Property Investments
More information on this subject is contained in the Taxcafe guide Tax-free Property Investments
