Property has been the foundation of retirement financial planning for a hopeful generation – but do the numbers stack up?
As house price increases and rents slow, more people believe property is the magic ingredient to a comfortable later life.
Although the Office of National Statistics reveals that 49% of retirement savers thought investing in property gave a better return than workplace pensions (22%) or ISAs (6%).
Although the stock market has soared to new highs, rental yields – the annual rate of return – have plunged on property.
The FTSE is yielding around 4.4%, while returns on property are between 3.2% in London and 5% in the north, according to figures collected by Your Move, Britain’s largest letting agent chain. At the end of 2015, the firm recorded average yields of 5.1%.
Strength is a weakness
Claire Trott, of Technical Connection, a tax advice firm, said: “Many people like property because it is tangible, and they believe that it is a great long-term investment. The reality is that property is difficult to trade and can take time to sell.
“Properties can also come with ongoing costs that can be variable and sometimes significant, such as substantial unplanned repairs. There is also the risk that the property may become vacant for a period which can mean additional costs or just a lack of income.
“Unless you plan to live on the rental income, which isn’t guaranteed, selling the property is a single one-off transaction on which tax is likely to apply.”
The factor that makes property an attractive asset is also the weakness that inflicts most harm on landlords – tangibility.
Buy to let taxes
Bricks and mortar is solid and immoveable, invoking confidence in owners. At the same time, politicians see that tangibility as a way of extracting tax.
Ministers have changed the way rental profits are taxed – by April 2020, new rules will demand tax on rental income less a 20% tax credit, erasing profits for many landlords in the higher rate tax bracket.
The government has also jacked up stamp duty on buying homes to rent out and capital gains tax on their sale, making entering and leaving the market costly.
It’s becoming easier to invest in property stocks and shares rather than land, homes and buildings.
The returns are no worse and the shares are easier and quicker to sell.
