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Pensions could return twice as much as property, research finds

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Returns on investing in a pension could be twice as high as investing in buy-to-let property, according to new research.

IG Group, calculates that if an investor purchased a £200,000 property, assuming 3.5% rental yield and 4.5% annual capital growth, they would return 237 per cent over 20 years after capital gains tax.

However, a 40 per cent tax payer could have maxed out contributions to their pension, and if they achieved a growth rate of 6 per cent net of fees over 20 years, returns could be as high as 435 per cent on the post-tax cost needed to purchase the buy-to-let investment.

IG puts the discrepancy down to new tax changes hitting buy-to-let landlords, including mortgage interest relief being set at 20 per cent from 2020 and not the marginal income tax rate, and the 3 per cent second home surcharge for stamp duty.

IG portfolio manager Oliver Smith says: “There is a stark contrast in the tax treatment of a property versus a pension, with pensions winning out by a clear mile. The recent tax changes on buy-to-let properties will make a huge impact on the potential for long-term returns. While these changes are only being fully introduced in 2020, a chill wind is already sweeping through the buy-to-let industry.”

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. Robert Milligan 19th July 2017 at 5:41 pm

    what a loan of rubbish, which part of the country do you live in,,, even down here in Bournemouth your figures are far wide of the mark, Property over the past thirty years has far out preformed pensions and if you include the Rent, well having done both I can assure you I do not have a pension.

    • Robert Milligan – you may be right but the author (and the research) isn’t talking about the past 30 years. He is referring to the current state of taxation which is unfavourable for property as an investment. So in a theoretical example using assumed growth and rental rates, it’s likely to underperform due to heavy upfront costs of property investment, plus ongoing tax treatment is far worse than that of a pension.

  2. For balance buying property doesn’t have the potential tax complications of exceeding the lifetime limit. Also properties can be placed into a beneficial interest property trust and highest rate mortgage interest relief is maintained. 3% SDLT is deductible against capital gains.
    Leverage debt and multiple purchases would potentially give higher returns than quoted.

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