Which is the better long-term investment?
Nearly half of people have more confidence in property than in pensions as a long-term investment, new research reveals.
One in six believe pensions are the better investment, with the rest either undecided or unconvinced by either option.
Londoners, young adults, workers earning £50,000-plus and people who are already homeowners were the most likely to favour property, according to the survey by financial services firm Abrdn. A separate recent study showed more young people believe they will use property to fund their old age rather than a pension - though few had a mortgage yet.
Generations aged 27-plus all said they were more likely to rely on pensions as their main source of wealth in retirement.
Abrdn points out property and pensions are not mutually exclusive investments. The firm also notes that pensions come with tempting ‘nudges’ like free cash boosts from tax relief and employer contributions.
Do YOU favour property or a pension as an investment?
The property versus pensions debate is long running, with supporters of the former pointing to huge capital gains from the house price boom and the lack of access to retirement pots until you are 55 (rising to 57 from 2028).
Proponents of pensions push the tax advantages, cash incentives and the convenience of overseeing investments at arms length. Meanwhile, people still need a home to live in when they reach retirement, which means they need to downsize, move somewhere cheaper or release equity to tap the value in their own property.
Buy-to-let investing can involve a lot of work, periods when properties are empty, and increasingly onerous rules and taxes.
The Abrdn poll found 48% of UK adults think that property is a better long-term investment than a pension and 16% the reverse. The firm has launched a new campaign called ‘The Savings Ladder: A Manifesto to Get Britain Investing'. Recommendations include simplifying Isas, scrapping stamp duty on UK shares and investment trusts and improving financial education.
Another is to increase minimum pension contributions under auto enrolment from 8 per cent of qualifying earnings to 16%. Qualifying earnings are those between £6,240 and £50,270 of salary, split between personal contributions and free employer and government top-ups.
Who pays what: Auto enrolment breakdown of minimum pension contributions
© Provided by This Is Money
What are people's savings habits and attitudes?
Abrdn's survey of 2,000 UK adults, carried out at the start of this year and weighted to be nationally representative, made the following findings.
- One in five people hold shares outside of their pension
- Three quarters of adults are savers, and three quarters of these savers favour cash
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- Some 64% own their own home - 37% of them outright
- Of those who don’t own their own home, 51% want to and 17% are actively saving towards this goal
- Among those who don't intend to buy a home, more than a fifth are resigned to it being financially unrealistic
- Some 22% have no pension savings
- Among the self- employed, 38% have never saved into a pension
- Outside pensions, 75% save in current accounts and 72% in cash savings accounts
- Those who invest are almost twice as likely - 19% versus 11% - to own direct shares rather than more diversified funds which help spread risk.
Stephen Bird, chief executive of Abrdn, says "with pressure on how far governments can go to support an ageing population, retirement pots will increasingly fall far short of what people need and deserve. The NatWest share sale could be a once in a generation opportunity for government to start a broader campaign. Just as the "property ladder" concept has crept into cultural consciousness, we need to develop the same enthusiasm for a 'savings ladder' where people can see the benefits of starting early, building their pot, and investing to grow it.
Minimum contributions into defined contribution pensions still need to radically increase, and ideally double. That’s not easy, but nor is an ever-increasing state pension age."
How a SSAS pension can transform your financial future
Standard pensions often bring to mind confusing jargon and offer little to no control but imagine a pension that changes all that. A Small Self-Administered Scheme (SSAS) offers full financial control and helps leave a legacy for your family.
SSAS pensions are particularly beneficial for property investors and developers as they are exempt from inheritance tax.
Property investors have successfully used SSAS pensions to achieve incredible goals that wouldn’t have been possible otherwise, such as transforming run-down, unmortgageable properties into homes for families.
What is a SSAS pension?
A SSAS pension is tax-efficient and unlike any other pension scheme, it’s simply a pension plan for business owners.
Unlike other pensions, a SSAS is a tax-free trust fund and not subject to capital gains tax, inheritance tax, or corporation tax. The real challenge with many pensions is that you often hand over control to an insurance company or adviser, leaving you in the back seat. A SSAS pension changes that by putting you in the driver’s seat.
While it may not be for everyone, as to be eligible for a SSAS pension, you must be part of a limited company. For example, you can lend up to 50% of your SSAS funds to your limited company. If you have a SSAS with up to 11 members—like family or business partners—you can pool resources. For instance, if two members each contribute £100k, creating a total pot of £200k, up to £100k—50% of the total—can be loaned to their company.
The real benefit is being able to grow your wealth today rather than waiting until your 50s or 60s. You can transfer traditional pensions into a SSAS if you have a limited company and are ready to take charge.
How to give away your pension – and make it easier for your heirs to spend it
Your pension is not just a means to fund your retirement – it’s the fruit of a lifetime of work, and it is important to plan what happens to this legacy after you die. Many people’s financial planning will focus on what happens to their home, savings and other assets that make up their estate – but pension savings can easily slip the net when it comes to making plans for when you’re gone.
This is important, since your pension can be a key way to reduce or even eliminate inheritance tax; while estates that exceed the tax-free nil-rate band are taxed at 40%, anything left in your pension pot when you die can be passed on IHT-free.
Telegraph Money breaks down how to make sure your pension goes to the right people, how they might be able to use it, and how they can limit how much tax they pay on it.
Make sure you name a beneficiary
What happens to your retirement savings depends on what type of pension scheme you are enrolled in. In a defined contribution scheme, which invests your money, you can nominate as many people as you like to inherit your pot, or part of your pot.
The person you name is known as a “beneficiary”. You can make a note of your beneficiaries in an “expression of wishes”.
This form can be drawn up to accompany your will (it’s a good idea to make sure your pension plans match in both) – and most pension providers will have a form in place ready for you to fill out. The administrators and trustees of your pension scheme will refer to this form when you die, but note that it’s not legally binding.
There are a few instances where a pension provider might not follow an expression of wishes. Sean McCann, of the wealth manager NFU Mutual, noted that the pension provider also has discretion on who to pay death benefits to “they will complete their own investigations, but will normally follow the instructions in the nomination unless there is a good reason not to, such as deceased leaving dependents that have not been adequately provided for."
You do not need to make any alterations in advance of making an expression of wishes, such as setting up a Sipp. The pension provider will automatically make a plan for your beneficiaries.
If you have a defined benefit pension scheme, your heirs won’t receive a pension lump sum – however your surviving spouse could then take over receiving your pension income, or a nominated beneficiary (though they usually need to be a dependent).
Defined contribution vs Defined benefit
© Provided by The Telegraph
Check how the pension will be passed on
In most cases, each beneficiary is given a few options about what to do with the pension money they inherit. The first option is to receive it as a cash lump sum. They can also leave the money in a “beneficiaries drawdown account”, from which they can take pension income or lump sums when they wish, otherwise the money stays invested.
While most pension schemes offer a lump sum death benefit, and many do not provide the option of a beneficiary drawdown.
You will need to check the options available to your beneficiaries with your provider – especially since the beneficiary drawdown option can be particularly helpful for passing down pension savings for years to come.
Option for passing wealth down the generations
Earlier this year Chancellor Jeremy Hunt abolished the pensions lifetime allowance, which previously capped tax-free pension savings at £1.1m. This means there is effectively no limit on the overall amount of money you can build up in pensions over your lifetime, and they are usually free of inheritance tax.
Michelle Holgate, of the wealth manager Brewin Dolphin, said "using this to your advantage could make a huge difference to your children or grandchildren’s financial future. If you die before age 75, benefits left in a defined contribution pension can be paid as a lump sum, annuity or received into a pension in a beneficiary drawdown plan with, in most cases, no tax to pay. If you die after age 75, a lump sum or annuity will be taxed at the beneficiaries’ marginal rate of income tax. However, if you choose beneficiary drawdown, tax will only be payable when income is drawn from the inherited fund, such income can be drawn at any age,
Therefore, as long as the funds stay in beneficiary drawdown, they will remain IHT-free and income tax-free. This means you could pass on your pension to your children, who could then pass it on to their children, who in turn could pass it to their offspring, raising the prospect of pension money cascading down the generations.”
You’ve inherited a big pension – now what?
Once you inherit a pension, the simplest option is to leave it invested in the stock market. However this means it could both fall and rise in value, so if you need to retire soon or are planning to use the money within the next few years, it might be better to cash out the pension sooner rather than later.
If you want to be more hands-on with how your pension is invested, you could also transfer the money into a “self invested personal pension”, or a Sipp.
Here you can choose what funds and stocks to invest in yourself, much like you would in a stocks and shares Isa. You can find our guide on how to choose a Sipp provider here.
Finally, you could opt for a guaranteed income. If you are of retirement age, then you can buy an annuity, which guarantees an income for life. Annuity rates are much higher now than they have been in more than a decade, thanks to higher interest rates. But this does not mean they are necessarily good value.