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Pension Vs Property

We recently had a pharmacist come to see us who wanted to start to invest inproperty. We have had many pharmacists and doctors invest with us, perhaps because regardless of the economic climate two things don’t change, people still get ill and end up dying! And so rain or shine these two professions are still making money, although the pharmacists tend to complain the industry is not as profitable as it once was.

The main aim of investing in property for our pharmacist is to develop a secondary source of income. Partly so he can reduce his hours of work and be more adventurous with his time and partly to develop a retirement income. The property would therefore need to be a high yielding one so that after mortgage and other expenses he would be left with a solid income.

We coincidently had just the right property for him. It’s an ex council property with five bedrooms close to Caledonian Rd station priced at £340,000. The comparables for this property were over the £400,000 mark and the current rental income is £525pw. Once minor updating has been done to the property it should achieve £650pw leaving over £15,000 after expenses. The location of this property would ensure the future growth prospects are strong. Even if we assume a zero growth rate the yield ensures this is still a good investment. So it’s a no brainer.

The money he had saved up was not working for him hence he wanted to put the money to work for him.

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Most of the time money in the bank is actually depreciating – when you consider the rate of inflation against the often paltry rates of interest the bank is paying currently.

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The number of people these days who have faith in private or company pension policies is dwindling. This sentiment extends to the NHS and the public education system to provide for their children. This is leading to a trend where many are taking control of their financial future by purchasing properties to secure their future and that of their next generation.

If you consider pension policies you will discover that intrinsically they have very unfair terms. One example is after having saved up all one’s life and contributed to their policy, if the policy holder were to die without leaving a spouse the policy would revert back to the scheme, what this means is they get nothing after saving all their life and they cannot pass on the lump to someone else as they would with another asset. If they have a spouse then normally 50% of the income is passed onto them.

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Normally an asset would form part of one’s estate and be passed on as inheritance, in the situation of a pension policy it would disappear in the event there is no spouse, and even if there is why should only 50% be passed on?

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Another point is regarding a company scheme, when a pension becomes over funded the excess is given back to the employer, this could be the reward you get if you contribute fully to the scheme and if your pension performs too well.

However if the policy is underfunded a few years down the line because it doesn’t do so well, you will need to top it up to meet the target benefits so it seems this is only a one way street!

We have only looked at a couple of points in a pension policy very quickly.

If we now consider the variety of charges associated with a pension policy such as Annual management fee, bid/offer spread, market value adjustment etc all these clever words are all saying the same thing: we take money from your pot and put it in our pockets.

It is no wonder then that membership of work place pension schemes has fallen to less than 50% and only one third of the private sector are enrolled in one according to recent figures provided by the Office for National Statistics.

I have had some experience in the pensions industry, after leaving university my job was involved with working out the losses made from investors switching from company pension schemes to private ones. The losses would be worked out retrospectively and prospectively meaning past losses which are known, and anticipated future loses would be estimated with assumptions.

These were caused by Financial Advisors who advised clients to move from their steady and safe final salary company schemes to the rocketing private schemes which where tracking the rising FTSE. This didn’t last forever and when the FTSE fell so did their pension values, hence the pension review which led to financial firms compensating clients for their advice.

The point being is the advisors didn’t really understand what they were selling. They just wanted their big commissions which were based on a percentage of the funds they transferred across. Even after spending some years working on the calculations side in this field I still did not understand pension polices. I just knew they were a lot more complicated to understand than they seemed at face value. Many who claim to know do not, as both the calculations and the laws around them end up being very complicated.

In essence a pension is a lump of money which you contribute too, and when it is time to draw down on this fund, normally at retirement, an annuity is purchased which means you start getting a monthly income. The contributions are tax free but the monthly income post retirement is taxable. As mentioned this stream gets halved on death if your spouse survives you, otherwise it disappears.

This can be compared to purchasing a property. When you buy a property you exchange a lump sum for a physical asset which provides you with a monthly income. We will assume there is no mortgage to keep things simple. The difference is you can understand the expenses, they will probably be maintenance and management charges and the income will be in the form of rent. The asset and the rental income will be passed wholly to whomever you choose as long as it’s below the Inheritance tax threshold. The property is in your name not some third party. You’re in control.

Question: Why would someone take out a pension policy in the first place?

The only incentive I can think of is the tax kick back on the way in. On the way out they get taxed as per normal, the overriding point here is they will lose half the asset when they die if not the whole lump. The probable reason is because their IFA told them to do so – he doesn’t get paid if he advises you to purchase a property. If you follow the money trail the chances are you will find the reasons why.

To recap, the advantages of property over a pension policy are: you understand the income and outgo, the property is in your own name so you are in control, you can get the income when you choose and not according to the scheme rules. It forms part of your estate so when you die it is passed on in whole to whomever you chose. The pension on the other hand could disappear on death. The down side of property is the possible of loss of rent and the hassle factor involved in managing a property. This can be neutralised by buying well, having a good managing agent and being choosy with the tenant.

Proper advice should be taken from a pension specialist in regards to your pension policy. We have only given a very brief overview and are no experts in this field.

The Real Deal

Price: £250,000

This well proportioned one bedroom flat which is located on the fourth floor of a purpose-built apartment building offers great living space in a fantastic residential area close to a range of local shops and amenities. The property comprises of a well proportioned reception room, a spacious kitchen with breakfast area, a bright bedroom with windows on two aspects and a bathroom.

Location:

Morris House benefits from its proximity to the shops and amenities of Paddington and Maida Vale while the closest transport links are Marylebone Station (Bakerloo line and National Rail Services) and Edgware Road Station (Bakerloo line).

Leasehold: Over 100 years

Service charge: £550 per annum (2011)

An extremely hot deal, the angle is to convert the property, rent it out as a two bed at £380pw. We have just done another one in the same block and you only pay 1% in Stamp duty

Suresh Vagjiani

Sow & Reap

A Property Investment Company

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! Tips of the Week

One source of getting funds to invest in property is your own home, this can be a very tax efficient way of investing as the interest element of the deposit can also be offset against rental income.

People are often surprised with how much property they can purchase, £100,000 will buy you £400,000 of property, this is through the principle of gearing.

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We offer a Property Sourcing Service, so call us now to see how we can help on 0207 096 1083 or email info@sowandreap.co.uk

Our Address: Westbourne House, 14-16 Westbourne Grove, London, W2 5RH

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