Buy-to-let properties, cash and gold all have their attractions this year. Buy-to-let allows you to invest in the rising UK property market. Cash offers security against economic volatility. Gold is a renowned safe haven and has posted steady growth in recent years.
However, if I had £20k to invest, or any other sum, I’d rather put it in top stocks through a Stocks and Shares ISA. This is simpler, more tax efficient and, ultimately, should be more rewarding. That makes it a far better way to save for your future.
Tough prospects
Buy-to-let, cash and gold all have serious pitfalls. Buy-to-let is expensive and effortful, with hefty upfront costs, and returns are heavily taxed. From April, the maximum tax relief you can claim on your mortgage interest falls to 20%, even if you pay tax at 40% or 45%.
The average cash savings account pays around 0.5%, and there’s little hope of that increasing for years. You can get around 1.4% on instant access, but leading rates don’t last long, and you’ll have to keep shopping around every year to maintain a decent return.
The gold price could fall if the world gets the coronavirus under control and global growth takes off. Gold is more volatile than you think and, after recent climbs, could be vulnerable.
Investment opportunity
If you want to build a £1m pension for your retirement, an easier way would be to invest in a range of companies using your annual £20,000 Stocks and Shares ISA allowance. You have until 5 April to use this year’s allowance.
If you’d invested £20,000 in the FTSE 250 index of medium-sized UK companies five years ago, you’d have £29,780 today. That’s a total return of 48.9%, with dividends reinvested. And that’s impressive, given that, for most of this time, Brexit uncertainty has been hanging over the UK stock market, as well as concerns over the US-China trade war… and now concerns over coronavirus.
Global growth
You get income as well as growth from the stock market. The FTSE All-Share currently offers a yield of 4.24% a year, almost three times the interest you get on cash, whereas gold doesn’t pay interest at all. You may get a yield of 5-6% on a buy-to-let, but that’s taxable, while the returns in a Stocks and Shares ISA are free of all tax, for life.
Stock markets are volatile in the short run, but in the longer run, they beat almost every other investment.
Many people fail to realise that top UK companies give you exposure to the international economy as well, especially those in the FTSE 100, which generate three quarters of their earnings overseas. So if global growth picks up, you should benefit from that too.
Better still, you can buy and sell in seconds and at minimal cost, and never pay tax on your returns inside that ISA. That’s why I favour the stock market over property, cash and gold, this year and beyond.
