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‘No surprise’ Investors turn away from property into pensions and ISAs

Columnist and financial expert to the Express David Woodward comments below.

PENSIONS now hold a bigger share of wealth than property across the entire UK, but does that make it a better long-term investment?

Property is often looked at as the cornerstone of long-term passive investments and is trusted by many investors to keep their funds ahead of inflation. However, as homeownership starts to decline in younger generations could the tables be turning in favour of pension investments instead?

Investment portfolios are usually diversified across a range of assets such as stocks, shares or index funds.

Property has long been a staple asset class in investment portfolios and is often seen as one of the more stable and profitable long term investment option.

It’s easy to see why this is, as property forecasts indicate that the UK market will increase by 21.5 percent by 2025.

However, the property market may soon be uprooted by pensions as what started as two equal asset classes now begin to compete for the younger generations’ income.

David Woodward, managing director of Woodward Financials, shared that the “inevitable” slow of the property market has been in motion since 2014.

The mortgage market review in 2014 first signalled an impact on affordability especially for first-time buyers.

Increasingly throughout the pandemic, would-be homeowners have struggled to gather enough for their deposits and be accepted by mortgage lenders.

Essentially, with investment assets like property, it only provides value and returns when it can be sold to buyers, and as the buying-pool narrows investors might find themselves at odds.

Mr Woodward added: “You do then start to question, will the house of cards collapse and when? It was only a matter of time before property investors decided enough is enough.

“Most recently property investors have experienced the added pressure on affordability: due to the pandemic, many lenders are restricting multiples of earnings when calculating borrowing to around 4.75 times salary and affordability also impacts landlords especially if they are considered a portfolio landlord holding four or more properties.

“Rishi Sunak is likely waiting for the death throes of the pandemic before announcing measures to claw back the pandemic relief, more than likely with tax rises placing a vice like grip on any surplus cash for years to come.

“However, the biggest shock to property investors was Section 24 and it is now starting to bite hard. But surprising even some landlords have no idea what Section 24 is.”

Section 24 was fully implemented in 2020, removing a landlord’s ability to deduct the cost of their mortgage interest from their rental income. This essentially taxes them on their turnover, rather than profit.

Mr Woodward shared the devastating effect this has, and said: “For some, tax rates will exceed 100 percent, as landlords will have to pay all their profit in tax and then pay more tax still.

“Section 24 will mean that most landlords will be paying an extra tax of 20 percent or more of their annual mortgage interest and other finance costs. The tax they pay may be greater than their real profit, leaving them with a rental loss and a cash shortfall.”

This also acts against potential property investors, as the stranglehold on affordability hasn’t yet been released yet many landlords have been forced to offload properties to reduce their tax liabilities.

As a result of this, many landlords have offloaded their properties to lower their tax liabilities, essentially freeing up supply for something that has no demand due to lacking affordability.

Mr Woodward clarified: “So it is with no surprise, that property investing which was once an attractive retirement plan for most is not looking so attractive in the current climate.”

In comparison, pensions are incredibly tax efficient and many investors have turned towards them as a form of investment and taking care of their retirement provisions.

Mr Woodward shared that a popular option has been to use ISAs as a way to save for retirement: “Tax free growth, tax free income, dividends paid tax free. With the allowance being £20,000 per person a couple could place £40,000 per year in this tax vehicle and on death, the ISA status can be transferred to the surviving spouse.

“With a little growth you could do very well over a 20 year period, the saying is ‘It starts with an ISA.’ By using ISAs and nothing else, your personal allowance will be used up by your state pensions and thus make you a non-taxpayer in retirement.”

He concluded: “Out of the two, property or pensions which one sounds the most attractive?”

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For more information you can contact David on 01753 839348 or email