Your morphing into tux, tom

I was taking the p@ss regarding Litecoin - a joke regarding our dearly and recently departed TUX.

I do believe with absolute certainty though that the stock market is a mugs game for 95% of people and am happy to explain why.

So i'm in property, and If I compare the two:

I have 100k which I want to invest.

I take this to the bank and they sell me 100K of mutual funds which they then charge me for the pleasure of managing, regardless of whether they go up or down in value.

Now with that same 100k I could put this down as a 20% deposit on a buy-to-let mortgage and buy myself a property worth 500k, I now have assets worth five times the original stake!

My buy-to-let will pay me rent each month whereas a mutual fund will pay hardly anything in dividends, certainly nowhere near as much as rent, this is even after I factor in a percentage for void periods and maintenance.

Over time and with natural inflation, my 500k asset will appreciate at 5 times the rate of a 100k asset.

I can also borrow against property so I can additional property No one (as far as I know) will lend you monies against shares.

I'm sure you are a good guy etc however I DO NOT believe in financial advise. Nobody can invest my money like I can. Financial 'advice' in my opinion is all smoke and mirrors, just a way to rip people off whilst the only people who make money are the people selling the products and making the commissions.

Its like the gold rush, most of the people who made money were not the prospectors, but the guys who sold the shovels.

Purchase through a limited company and mortgages are still tax deductible, just like any other expenses.

Rip off comment possibly not fair - apologies GM, no offence meant.

Tom

The tax benefits of contributing to a pension

This topic is fairly technical, but I feel its an important one to raise as the vast majority of clients I speak with are not aware of how generous the government are when it comes to making pension contributions. The government have identified that there is a huge income shortfall for retirees in the UK and as such, the tax incentives to save into a pension are fantastic.

Before diving in, there are three main types of pension in the UK. The State Pension is based on your National Insurance contributions and to qualify for the full miserly £175.20 per week (£9,110.40 per annum) at age 67, you will need to make 35 years of NI contributions. This will pay a guaranteed income for as long as you live and will be increased with inflation each year, in April.

‘Final Salary’ pensions (also known as’ Defined Benefit’ pensions) are workplace pensions and are pretty much closed in the UK now for the private sector for new contributions, although many ‘deferred’ Final Salary pensions remain. These types of pensions still exist at large for many in the public sector. Like the State Pension, these will pay a guaranteed, inflation linked income for life. The amount of income the individual will receive is based on a combination of length of time in the pension scheme and their salary at the time of leaving. There will be several variations across each scheme, such as definition of salary, normal retirement date, calculations for income (accrual rate), percentage of spouse’s death benefits and amount of inflation linking.

The most common form of pension today is known as a ‘Money Purchase’ Scheme (also known as a ‘Defined Contribution’ Scheme). These are typically the type of pension which would be set up by your employer, or something you may have set up privately via your bank or a Financial Adviser. People are often phased by the complexities of pensions, but in essence, this is simply a savings account which you, and most likely your employer, pay into each month. Inside this pension, your money is invested, which over time should benefit from investment growth (see explanation of ‘compounding’ in my previous article). If you have never selected an investment yourself, your money will be automatically invested into a default option chosen by your employer. Under current legislation, you cannot withdraw your pension savings until age 55.

This article will concentrate on the Money Purchase (MP) pension.

Contributions to employer sponsored MP pensions are usually made by ‘salary sacrifice’. This means that it is deducted from your gross salary before income tax is deducted. For example, if you have a £40,000 salary and contribute 10% (£4,000) per year via salary sacrifice, you are only pay income tax on £36,000 rather than £40,000. The contribution is therefore tax free.

The other way to contribute is to make an ad hoc contribution (known as the ‘relief at source method’). Contributions here are made net of basic rate tax. Using the same example of an individual earning £40,000 (a 20% basic rate taxpayer), a net contribution will be grossed up by 20% automatically by the pension provider. So, by making a £4,000 contribution, it will instantly be turned into £5,000 (£4,000/0.8 ). It’s free money!

This becomes even more attractive for higher rate taxpayers as you are entitled to full income tax relief. The higher rate relief is awarded by adding the amount of the gross contribution to the individual’s basic rate and higher rate tax band. This provides additional tax relief by increasing the amount of income taxed at 20% rather than 40%.

To explain, using an example of an individual earning £80,000 (a 40% higher rate taxpayer), as before the £4,000 will be instantly grossed up to £5,000 by the pension provider. As the individual is a higher rate taxpayer, they are entitled to a further 20% relief. This higher rate relief (an extra £1,000) is claimed via self-assessment or adjustment to your tax code which HMRC will provide to your employer. The extra £1,000 will turn up in your next salary, or you’ll receive a cheque from HMRC. So, this would turn £4,000 into £6,000 simply via tax relief.

Broadly speaking, the annual limit you can contribute to a pension is the lower of £40,000 or your annual earnings. There are complex rules for those earning above £150,000 per annum and it is also possible to carry forward unused allowance from the 3 previous tax years – this is complex and not necessary to go into.

Once the money is invested within a pension, like an ISA, it will benefit from tax free growth. Upon withdrawal, 25% will be available tax free, with the remainder added to your other taxable income and taxed at your marginal rate.

My tip for today is to check with your HR department to see what percentage personal contribution you need to make, in order to qualify for the maximum employer contribution. As an example, in one of my previous companies, I was automatically enrolled into the default 4% contribution which was matched by the company. It turned out that the company would match my contribution up to 8%, so my additional 4% (8% in total) contribution got me an extra 4% for free from my employer. Each employer will offer different levels of staff benefits. This is an easy way to get additional free contributions from your employer. The more you can save into your pension, the more income it will be able to generate in retirement.

As ever, feel free to ask any questions.

Edited by Goal Machine (04 May 2020 9.08am)

Your comparison shows quite a few flaws in my opinion.. Mainly you’re assuming you own the property before you’ve paid off the mortgage. No, the bank still own it then.

So, your assets worth 5x your stake is not accurate, you should consider net assets. This will be your initial 100k less 15k (land transaction tax) less estate agent fees (5k) and mortgage fees (2k).

So you start off £22k down. Also buy to let mortgages are worked out on a different basis to residential. Most people would struggle to borrow £400k against a £500k house.

Then there’s redecorating, management fees, furniture/goods replacement costs, void periods, tenants in financial difficulties, bond schemes for the deposit.

Also, you can no longer offset mortgage interest costs against your income from the property.

Over history (so far) the stock market goes up more than property. Passive funds with low management fees make it even more attractive.

Of course, you’re welcome to your view, this is just what I believe.