For many with money to save there are two choices: put money into property via a buy-to-let, or invest in stocks and shares via a pension or Isa.
MarkMeikle, 33, is at such a crossroads. He has two buy-to-let properties in addition to his own home and cash savings. He has no other significant investments or pensions.
MrMeikleworks in medical equipment sales, and earns just over £50,000 including bonuses. After mortgage payments he has around £2,800 a month surplus from his salary and rental income. His earnings should rise in future years.
He has £35,000 in cash in a Santander 123 account, and several thousand pounds of premium bonds and shares.
He said: "I seem to have accumulated a bit of money and I don't know in what direction to go. Do I continue trying to invest in buy-to-lets, or do I diversify and look at other long-term investments? I know I'm not maximising my Isas or my pension pot so I know those are areas I probably need to consider."
MrMeiklelives with his girlfriend, who is an IT adviser and has three properties of her own, including two buy-to-lets.
One option is for each to sell the home they live in and for the couple to buy one together. This would avoid the additional home stamp duty surcharge that applies to second-home purchases.
If MrMeiklekeeps his current home and lets it out, he will need to change his residential mortgage to a buy-to-let mortgage. His aim is to retire debt-free before 65 on £3,000 a month. His only debts are his mortgages and he pays his credit card off in full every month.
"If I come across a good investment I'm happy to say, let's put it all in there. I know I can build my cash reserves back up to in excess of £5,000 in a few months," he said.
"I've been reading a lot about government-backed bonds for wind farms. I've also looked at guaranteed rental yields for student accommodation, and new technology start ups."
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Gary Smith, financial planner at Tilney Bestinvest, said:
MrMeikle'spension funding is woefully inadequate and he is not taking advantage of the tax reliefs available to him. He intends to increase contributions and I'd encourage him to do so. This needs to be balanced with his wider objectives, and he should consider investment Isas.
MrMeikleneeds access to capital, as his circ*mstances are likely to change, with the potential of moving home and having children. A retirement target of £3,000 a month from 60 should be achievable if he retains his two buy-to-let properties, secures permanent occupancy and the mortgages are repaid.
But the main element should be pensions. The most advantageous aspect of the pension funding exercise would be an immediate uplift of 25pc on the amount put in (through basic rate tax relief). He would also receive an employer contribution.
He will also be able to claim higher rate tax relief via his annual tax return. There may be taxable consequences when funds are drawn, but thanks to 25pc of the pension fund being accessible tax-free, and the other 75pc likely to only be taxable at 20pc at most, it is very tax efficient.
If he retires early, he may be able to use personal allowances to generate tax-free income for a period.
MrMeikleshould consider saving into Isas, as he will see tax-free growth and can use this to generate a tax-free income in retirement. Using a broad spread of investment vehicles should enable him to get the income he wants in the most tax-efficient manner possible. He should consider adopting different levels of risk in his various investment vehicles.
Given that he won't be able to access his pension funds for at least 23 years, and, as he will be making monthly contributions, he should consider higher levels of risk to maximise long-term investment growth. This could involve investing almost entirely in shares.
As he can access the money in Isas immediately, he may prefer a medium level of risk there. This might involve a mix of shares and bonds in developed markets.
MrMeikleis considering investing in student accommodation for the "guaranteed rental yield" but I'd urge caution as often yields are lower than promised.
Many packaged student accommodation funds (often registered offshore) have had liquidity issues and investors have been "locked in" and lost money. He should also be careful before investing in wind farms or tech start-ups, as investing in individual sectors increases risk.
Alison Treharne, chartered financial planner at Shore Financial Planning, said:
Buy-to-let has worked well for MrMeikle. But it is not risk-free and he also risks a lack of diversification. He will lose tax relief on the mortgage payments gradually from 2017 so by 2020 the tax will be almost double what it is now.
His properties may be a useful source of income in retirement but will be taxed under capital gains tax rules (18pc or 28pc) if they are sold in his lifetime, and there is the possibility of inheritance tax at 40pc if left in his estate on death.
He and his partner are heavily exposed to the UK property market. Why take even more risk with this one narrow asset class? More debt and more property is a very high-risk strategy. They can sell their main residences and not be subject to capital gains tax rules if the sale is within 18 months of moving out.
From 1 April 2016, MrMeiklewould usually have to pay a three percentage point stamp duty surcharge if buying an additional residential property.
But he won't pay the extra 3pc if the property replaces his main residence and that has been sold. If buying a new main home, he should take out a repayment mortgage with no longer than a 26-year term, so it is paid off by his target retirement age.
The couple could see their finances as one entity and spread capital and assets. He gets no interest on his Santander 123 account above £20,000, so his extra £15,000 could fund a Santander 123 for his partner, with up to 3pc interest.
That is a good cash emergency fund, especially if they plan a family. They each have a personal savings allowance of £500 or £1,000 depending on tax band, so that interest would be largely tax-free.
If they marry they can consider if keeping properties in one name or joint names suits their tax position better. Mr Meiklepays 40pc tax on the rental income as his salary and bonus already makes him a higher-rate taxpayer.
In the future, property could be transferred with no tax implication between them as spouses. But there may be a period when one or the other isn't working when it may be better to have the rental income in the non-earner's name.
Using both capital gains tax allowances (£11,100 a year) would help when selling property, too. As family responsibilities rise, he should consider what income and life assurance protection is needed.
As for his partner's buy-to-let properties - I would sell them over two tax years, before interest rates go up, the property market falters and capital gains tax rates get worse. They could use any equity released to help buy their "forever" home in the fewest moves possible: the cost of moving is now heavy with stamp duty and legal costs.
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