Property or pension: which is better for retirement?

Deciding whether to invest in a property or build a pension pot through stock market investing is one of the most common questions we get asked at Steps To Investing. Here, Faith Archer, personal finance journalist and money blogger, goes five rounds on which is best. Who will win?! Read on.

Roll up, roll up for the big face-off between property and pensions: which is better to fund your retirement? 

Rising property prices, which have surged to record levels since last summer, mean many homeowners are sitting on a small fortune. However, you can’t pay bills in bricks and 

mortar. Turning property into income usually requires either selling your home and moving to a cheaper property, or investing in a buy-to-let.

Meanwhile pensions invest your money in the stock market, with tax breaks to bribe you to lock your money away until retirement. 

In one corner, property is solid and familiar, traditionally seen as ‘safe as houses’. In the other corner, pensions are less tangible, as your contributions disappear off into investments.

Both have pros and cons, but which will deliver the knock-out blow, so you can live it up after work stops?

Click to watch our video on investing for retirement using a Self-Invested Personal Pension

Round one: income and growth?

Pensions and buy-to-let both have the potential for the same winning combination of long term growth and rising income. 

Both hold out the hope of increasing in value, whether driven by rocketing property values or surging prices for the assets in your pension, such as shares in companies. Both can deliver rising income, whether as rent on a buy-to-let or the dividends paid by shares.

On the flipside, both also bring the risk of loss, when your investment loses value. Stock markets may be more volatile, but house prices can fall too, as homeowners who suffered from negative equity in the early 90s and the 2008 credit crunch remember only too well.

Looks like it’s neck and neck after the first round, as property and pensions can both offer growth and income.

Round two: tax benefits?

When it comes to tax, pensions win hands down.

With pensions, you get showered with free money. 

For every £1 you pay into a pension, the government adds another 25p in basic rate tax relief. If you pay higher rate or additional rate income tax, you can claim even more. Plus, if you are eligible for a pension at work, your employer has to top it up by at least 3% of qualifying earnings.

Money inside a pension grows free from income tax and capital gains tax, and when you finally take money out, the first 25% is tax free too. With some pensions you can also choose how much you withdraw and when, and therefore cut how much tax you pay.

If there’s anything left in your pension pot when you die, it can pass to your nearest and dearest free from inheritance tax.

In contrast, the tax bills on buy-to-let can be hefty. 

When buying a rental property, you have to pay an extra three percentage points in stamp duty land tax, if you already own your own home. You are liable for income tax on the rent, and the government has whittled away at tax breaks on buy-to-let mortgage interest payments.

When selling a property that isn’t your main home, you may also have to pay 18% or 28% capital gains tax on any increase in the value beyond your capital gains tax allowance.

After death, property is counted as part of your estate for inheritance tax purposes, so the tax man could potentially take 40%.

Round three: time, trouble and expense?

In fact, property involves a lot more time, trouble and expense than pensions.

Buying a property is a pricey business, from scraping together thousands of pounds for a deposit, to forking out for surveyors, stamp duty, searches and solicitors. In contrast, some pensions can be started with just £1.

You will need to find the right property in the right place to generate enough rent to cover chunky running costs such as mortgage payments, maintenance, insurance and empty periods between lettings. Landlords also need to deal with tenants and emergency repairs, or pay a managing agent to do so. 

Meanwhile with pensions, the costs are lower, often under 1% a year in fund and platform fees, and more predictable. Maintenance is limited to adjusting the mix of investments from time to time, or paying another 1% or so for an adviser to do it for you. A pension will never ring you up in the middle of the night to fix a leak or present you with the bill for a new boiler. 

You can also top up pensions with much smaller sums than buying a whole house.

For an easy life with less expense, pensions definitely score the points in round three.

Round four: Accessing money before retirement?

Two big advantages of buy-to-let are that you can borrow to buy a property, and you can benefit before retirement. 

Using a mortgage to buy property gives you the chance to win big if house prices rise – although if prices fall, you could end up owing more than the property is worth. 

You can also tap into the rent from a buy-to-let, or even sell the property, whenever you want. 

With a pension, you can’t touch the money before you reach 55 at the earliest (rising to 57 from 2028). This shouldn’t be a problem if your savings are ear-marked for retirement, but won’t help if your circumstances change.

Round four and buy-to-let is fighting back, due to access to mortgages and money before retirement. 

Final round: Taking income in retirement?

When you do finally retire, property seems like an easy option. Regular rent is a great replacement for a monthly salary. 

However, you will need spare cash to cope with gaps between tenants or to cover unexpected bills. It’s also difficult to get hold of money tied up in a house. Selling a property can take months, and even re-mortgaging usually involves fees and paperwork.

With pensions, you face more choices about how to take an income, for those who aren’t lucky enough to have a ‘defined benefit’ or ‘final salary’ pension paying out a known amount. 

You will need weigh up whether to whip out your whole pension pot, use it to buy a guaranteed income known as an ‘annuity’, or leave it invested and withdraw money when needed, known as ‘drawdown’. Overall, it’s far easier to dip into a pension, although if you get it wrong, the money could run out before you do. In the final round pensions edge ahead. They may require more decisions, but are far more flexible, and you can always pay an adviser to help.

Property or pension: the winner?

Property and pensions have both delivered some fantastic returns over the last few years. 

Both have their pros and cons. 

Property is familiar, with regular monthly payments and the chance to use a mortgage to punch above your weight.

But if you want an easy life, pensions offer far more flexibility in later life, at lower cost and without the unexpected bills and hassle. Plus, you can snap up free money from tax breaks and employer contributions, to boost your retirement savings.

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Marcus De Silva
Date published:
09 / 09 / 2022
Reading Time:
5 minutes