False sense of wealth

Today’s report from the Irish Central Bank provides some bank holiday cheer; we are all wealthier!

A lot of our new-found wealth derives from rising housing value. Savings and investments also play a role but is the rise in housing value that is the big driver.

The Central Bank is not wrong in its assessment. For over a decade, I have advocated that homeowners buy their homes as a form of forced savings and wealth creation. But, it is just one of a number of key steps I recommend be taken to build, grow and protect personal wealth.

Property, especially buying ones home to live in is a very efficient form of wealth creation. Especially attractive is the tax efficiency.

But property is also a very cumbersome form of wealth creation. Once the property is fully owned – where any outstanding mortgage is fully repaid and the buyer actually owns the property, they cannot fully realise the value of that wealth except if they were to sell it or take on more debt secured against it.

This is why it is important families use other means of wealth creation which they can access in the future. For example, using tax relief to start a pension or participation in a company-sponsored pension arrangement are highly rewarding means of building a flexible form of personal wealth. This is wealth that can be liquidated quickly and tax-efficiently.

Property, when taken as a source of personal wealth is a good way of building that wealth.  But property is also a cumbersome way of accessing that wealth for those still living since it also doubles as their shelter, a basic human need.

For Irish families that fully own or are paying down mortgages on the homes they live in, the latest Central Bank report makes for interesting reading. In some cases, it may help some people feel a little more positive. But, the bottom line is that in order to build meaningful, accessible wealth, investing (not property) is the most efficient way of achieving this and the best way of achieving that is through tax-efficient pension arrangements.

Finally, when it comes to investments, the best route to long-term growth and returns will depend on the cost of management and the Ongoing Charges Figure; the lower, the better as investments stand the best chance of maximum rates of growth when fees are kept to a bare minimum.

Frank Conway is a Qualified Financial Adviser

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