As safe as houses?

Of course, a nine or ten percent annual return on an investment may not look too bad, when you consider that it is essentially tax free (apart from stamp duty, inheritance tax, council tax and, if you use any part of it commercially, potentially income and capital gains tax).

However, for most people realising the investment potential within their home is something that only comes late in life, when they retire and downsize, or use an “equity release” arrangement. It is also worth considering that if your home is worth (say) £400,000 and your other investments are worth £150,000, then more than 70% of your entire investments are in one asset class – residential property. If this starts to fall in value, and this has happened in the past, then the impact it will have on your overall investments is significant.

So for many people, investing in the buy-to-let market may not be quite such a good idea after all. Of course, not all residential property is going to perform in the same way, at the same time. For example, homes in Northern Ireland have risen in value by more than 29% during the last year, while those in the west midlands have not even achieved a 5% growth. And student property in a major university town may be less likely to suffer from a recession than some other forms of buy-to-let property – unless the university cuts down on courses.

For some people, commercial property may offer a form of asset class diversification, but unit prices are frequently high, as properties tend to be larger than houses, so the “bar to entry” can be insurmountable. One alternative is to use a collective investment scheme, but these can sometimes prove expensive and inflexible.

For the majority of investors, therefore, alternative – and perhaps more easily accessible – investments are likely to be attractive for all practical purposes. Buying shares in companies in the UK and overseas may make good sense in terms of asset class diversification, but they are highly volatile and require understanding of the underlying business strategies of the companies concerned as well as the willingness to accept short-term, or even long-term, reversals.

Collective investments such as unit trusts and investment trusts are likely to be most valuable for many people because they invest in a wide variety of companies within clearly defined categories. By choosing carefully, it is possible very easily to build up a portfolio of holdings that is diverse in terms of industry sector, company size and geographical location. This allows you to benefit from the upside potential of many markets, while limiting your downside risk, should any individual sector suffer a reverse.

And by investing via an Individual Savings Account (ISA), a husband and wife can invest up to £14,000 this year (expected to rise to £14,400 for 2008/9) in a “tax shelter” which means the money grows free of UK taxes (other than the 10% withholding tax on dividends) and can be paid out as a lump sum or income totally free of tax, at any time.

And, of course, you can also invest up to your entire earnings (subject to a limit of £225,000 for 2007/8) into a pension scheme, provided your entire pension fund does not exceed the lifetime allowance (currently £1.6 million) and enjoy the same tax free status. Investments even attract tax relief at your highest marginal rate and a quarter of your entire fund is currently free of tax, when you come to draw benefits.

If you require any further information about the services that we provide or would like to review your financial planning position, please contact us

Articles