Premium Bonds, Property or Pension?: What is the smart investment choice?
Are you thinking about investing in your future, but not sure where to start?
The best time to start investing in your future was yesterday. The second best time is today. As costs spiral ever higher, you might be focusing only on the here and now, which is understandable. But if you are thinking about investments for the future, you may be wondering where to put your money.
Rent Guarantee Insurance
So we’re here to break down your options.
Buying Premium Bonds
Premium bonds are an investment from National Savings and Investment (NS&I) where you are entered into a monthly prize draw where you could win anything from £25 to £1million (tax free!). Traditional investments, on the other hand, earn interest or a regular dividend income.
It’s a little like playing the lottery in that you could win a life-changing amount of money, but you still have access to the money you’ve invested (unlike with the lottery). NS&I is also government-owned, so your investments are backed by the Treasury. Which guarantees that your money is safe as houses!
Another bonus of premium bonds is that they are tax-free, but this is only really an advantage if you are in a high tax bracket.
Your personal savings allowance (PSA) is the tax-free allowance on your savings – essentially, how much interest you can earn on your savings before you start paying tax. Most people can earn up to around £1,000 in interest before they are taxed.
Bonds are at their best if you have a large sum of money in them – the larger the sum, the more likely you are to win! As all of your winnings are tax free, if you pay tax on your interest, it’s worth calculating how much tax you’re paying and working out if premium bonds are a better investment option. If tax is something you’d like more about, be sure to check out our tax webinars.
However, don’t forget, you can only save up to £50,000 in premium bonds.
Premium Bonds Pros and Cons
Your money is pretty easily accessible
There might be a delay in access around the draw date
Risk free investment. As NS&I is government-owned, it won’t go bust
Your chances of winning big (or winning anything at all!) are quite low
You could win big!
You won’t make any interest - so if you don’t win, you don’t make anything
Investing in your pension pot
If you’re looking to the future, it’s likely you’re already thinking about your pension. But have you started saving yet? As a general rule of thumb, halve the age you started your pension and this is the percentage you should be putting into your pension. So if you started your pension at 30, you should put 15% of your pre-tax salary into your pension.
There’s a reason that pensions are the go-to when it comes to retirement planning, as you can benefit from top-ups from your employer.
However, many people are so focused on buying their first home that they put off pension planning until later and, as you can see, the later you leave it, the more you have to put into it. As the average age of first-time-buyers goes up, this can quickly feel like too much to invest out of your salary.
Pension Pros and Cons
Tax relief on your contributions - your salary is taxed after your pension has been subtracted
You can’t access your pension until you are at least 55, so it’s not something you can use in case of emergency
Compound interest means you’ll make a return on your returns
Possible poor returns, as your pension is invested in stocks and shares so there is a risk involved
Employer contributions help top up what you’re saving
Managing your various pensions can be tricky if you’ve had multiple jobs
Guaranteed income, whether you decide to buy an annuity (which will provide you with regular income) or keep your pension invested (as it may continue to grow)
Making decisions about what to do when claiming your pension can feel overwhelming and complicated
Putting your money into property
While there are other things you can invest in, property is a tried and true investment because while there is no sure thing when it comes to investing, property pretty reliably accrues in value.
If you invest in property you have two options ahead of you:
- Use the rent. You could decide to remain a landlord post-retirement and use the monthly rent to boost your pension
- Sell up. You could decide to sell up your property portfolio once you retire and put the bulk amount into your pension fund
If you decide to invest in a Buy-to-Let, you will be taking a much more active role in your investment than you would in your pension or premium bonds. You’ll need to:
- Find tenants. With Mashroom’s platform, you can do this for free, but we do recommend that you reference any potential tenant to make sure they’re the right fit for you
- Stay compliant. You’ll need to update your Gas Safety certification every 12 months, your EICR every 5 years and your EPC every 10 years (unless you make significant changes to your property that would affect your rating). Use our free Document Storage Tool to keep everything safe and get alerts when things are due to expire
- Invest in your property. You’ll want to make sure that you have Home Emergency Insurance for anything that might crop up and Rent Guarantee Insurance will give you peace of mind, but you’ll also want to invest in your property over time to keep it looking great
Property Investment Pros and Cons
Your property is likely to accrue in value
You can’t access the full value quickly - you’ll need to sell up, which takes time
You can either take a regular income from the rent or sell up for a lump sum later
You will need to manage the BTL, so you will need to be hands on
You can release equity from your investment property to invest in more properties
The more properties you have, the more time you will have to spend on management
You can build your own independent business alongside your day job
You may encounter void periods that you will need to manage
What you do is up to you, but before making a decision, do your sums and your research!
As with all investments, even the most stable option can go down as well as up. We urge you to take your time before you choose to invest and consult with experts wherever necessary.