Attractions of a property pension

Regular pension providers promote the tax efficiency of pensions in particular, that you can receive up to 40% tax relief on contributions. However, when you buy a regular pension, not all of your contributions go towards your pension fund. A proportion of your contributions will go towards commission payments to sales staff, administration costs of the pension provider, profit for the pension provider and providing dividends for their share holders. It has been estimated that in some cases only 50% of pension contributions actually go into pension investments.

On the other hand, direct investment in residential property can be a lot more efficient in terms of the proportion of your cash being ploughed into the investment. Additionally, the tax breaks on property make property investment more attractive over the longer term ie for rental income the tax breaks available include the ability to offset mortgage interest costs against rental income and the 10% allowance against gross rents for wear and tear; for capital gains on the sale of a property the tax breaks include the ability to offset purchase costs such as stamp duty and costs for all improvements. If a property is held over a long period taper relief on capital gains tax is reduced to 23% (for a higher rate payer).

If you have built up contributions of £15000 into a regular pension then £15,000 (less costs) go into buying units in stock market based funds. If you put £15,000 in a property purchased using a 85% LTV mortgage, then you are benefiting from income and capital growth of a £100,000 asset!