Are pensions, Isas or property best for your retirement nest egg?

Getting the best return on our hard-earned money is more important than ever with inflation so high. But it can be difficult to know where it is most likely to grow.

Anyone who has invested in real estate has done well, but the tax benefits of a pension and the flexibility of an Isa should not be overlooked.

Pensions are about to become even more generous on the tax front after the Chancellor announced a round of reforms to keep people in work longer.

So has this given pensions a new advantage? Cody Beecham, author of the blog Personal Finance Guru, says determining which investment is the best investment over time depends on many factors, such as your financial goals, tolerance for risk, and how long you can leave it untouched.

Figures collected by wealth manager Saltus for Money Mail show that someone with a £20,000 lump sum to invest would have made the highest profit over the past two decades if they had put it into a pension.

In reality, however, it’s not that simple. Those who used their £20,000 to buy a £200,000 mortgage to let would have received the full value of the property price increase when they come to sell, not just the increase in value of their original stake, because in in fact, a profit on borrowed money (the mortgage) drops.

In very simplistic terms, if you invested £20,000 in a pension 20 years ago, it would be worth just over £88,000 today. It would be worth £70,400 in shares of Isa.

If you had bought a property for £200,000, the £20,000 portion would be worth just under £46,000. However, the whole property would be worth half a million pounds, giving you a huge profit of £300,000.

Here’s how each asset stacks up:

Pension

You can invest in a self-invested personal pension (Sipp), or put more money into your company pension, which is a pot of money invested for your retirement. You can only access it at the age of 55, this is expected to rise in the coming years.

ADVANTAGES: You get tax relief on any contributions you make and the funds become tax-free until you retire. This means it costs a basic rate taxpayer just 80 pence to put £1 into a pension. For a higher rate taxpayer it costs 60 pence, and for a high rate taxpayer it is 55 pence.

The amount you can put into your pot tax-free each year, known as the ‘annual allowance’, will be increased from £40,000 to £60,000 from 6 April.

With effect from the new tax year, the punitive charges under the ‘lifelong benefit’ will be abolished. This allowance limited the amount you could have in your pension tax-free to £1,073,100, above which you could pay up to 55 per cent. should pay taxes.

Cons: Pensions can be inflexible. You cannot access it until you are 55 years old. You are also limited on how much you can contribute £40,000 each year for the current tax year. From April 6, however, this increases to £60,000. Only a quarter of your pension fund can be withdrawn tax-free. The rest is taxed at your highest marginal tax rate at that time.

Repeated changes in the pension system and constantly shifting goalposts have made it difficult for savers to plan ahead.

GIVES BACK: Saltus calculates that £20,000 invested 20 years ago in an average pension fund with 40 pc. up to 85 pc. in stocks and the remainder in bonds, would be worth £88,000 today. It is assumed that the pension saver is a higher taxpayer.

Good guess? It’s hard to argue against real estate as an investment class, but tax changes have had a detrimental effect on some landlords

Property

Many people see their home as their best investment, but the truth is that you always need a home. Buying a property to rent out is a more realistic investment option.

ADVANTAGES: Real estate values ​​tend to rise, so it’s a difficult asset class to argue against as an investment.

Most people will use a buy-to-let mortgage to finance an investment. When the property is sold, the buy-to-let landlord pockets the capital gain and also benefits from rental income over time.

Cons: Changes in the tax treatment of rental properties have made this type of investment less favorable, while the risk comes from potential vacancy periods where no rent is earned, problems with tenants and rising mortgage rates.

GIVES BACK: A £200,000 property bought 20 years ago with a £20,000 down payment would now be worth around £460,000, making a £440,000 profit.

However, this does not take into account rental income, taxes, expenses or interest on your rental mortgage, although stamp duty and capital gains tax are included.

Is a

Any money invested in an Isa can grow tax-free, whether invested in stocks or saved in cash. This means that you pay no tax if you decide to withdraw your savings.

ADVANTAGES: These tax-friendly accounts are flexible because you can deposit your money as and when you want, unlike real estate or pensions.

Cons: Unlike a pension, there is no tax credit on contributions to Isas and you can only contribute a total of £20,000 per year.

GIVES BACK: £20,000 invested in an average fund 20 years ago would now be worth £70,474. However, no additional tax has to be paid when the money is withdrawn, such as with a pension.