Property vs Pension: Key Considerations for New Investors

February 8, 2024
Property vs Pension: Key Considerations for New Investors

Is investing in property as safe as houses? We compare owning property and pensions for retirement. 

When considering retirement planning, individuals often contemplate whether their property investments can serve as a substitute for traditional pension plans. This guide explores the viability of property investing versus pension schemes for building long-term wealth.

The notion of "my property is my pension" typically revolves around two strategies:

  • Buying the biggest house you can afford and then downsizing
  • Buy-to-let 

Historically, the property market has demonstrated significant growth, particularly in the UK, where house prices have outpaced inflation by an average of nearly 4% annually from 1970 to 2021. However, while property investment can yield substantial returns, it's crucial to consider potential drawbacks and compare them against pension plans.

Which could be the best investment for you? Read on to find out how property compares to a pension when it comes to critical factors like:

  • Return on investment
  • Tax and income
  • Risk
  • Cost
  • Practicalities 

Return on investment

PROPERTY

UK house prices have grown by around 73% over the last ten years.

  • Rent could boost your profit.

With the average UK rental yield around 4.75%, rent could provide a healthy income to fund your retirement.

The rent you generate will vary depending on where you can afford to buy, and gaps in your tenancy can bring your yield down and leave you without income.

  • Downsizing might release less cash than you expect

Hidden costs can often run to more than you expect with agency fees, legal fees, stamp duty and improvement costs - meaning you have less to rely on in retirement.

PENSION

The UK stock market has grown by 20.4% over the last ten years.

  • Your boss pays in.

Under current automatic enrolment rules, if you're eligible, your employer must contribute the equivalent of at least 3% of any qualifying earnings to your pension each year. The extra money going in can add to the growth of your pot over time.

  • You get a government top-up.

If you're under 75 and a UK resident, you'll automatically get a 20% uplift from the government when you pay in, and you could reclaim even more if you pay tax at a higher rate.

Pension and tax rules can change, and benefits depend on your circumstances. Speak to an experienced financial adviser to learn more.

Getting cash at retirement

PROPERTY
  • You can get cash at any age

Unlike a pension, money invested in property isn't locked away until a certain age or date. If you can find a buyer or tenants, you can start reaping the benefits whenever you like.

  • You have less control over your income.

Rent can produce a steady income stream to get you through your retirement. But things could get tight if you have a gap in your tenancy or unexpected expenses.

If you sell your property to release cash, you'll receive a large lump sum in one go. This can have tax implications and mean that there isn't a gradual release of funds to help you phase your way into retirement.

PENSION

Accessing your personal pension

  • You can generally access your pension from age 55 (57 from 2028).
  • You don't have to access your whole pension or tax-free cash in one go; you can do it in stages.
  • You can swap your pension for a guaranteed income (an annuity), which will continue to pay out for as long as you live.
  • You can keep your pension invested and make flexible withdrawals (through drawdown or lump sums) to suit your changing needs.

Risk

PROPERTY
  • Over-exposure to property increases your risk.

Relying solely on property to fund your retirement means putting all your eggs in one basket. Changes to the housing market, legislation, tax rules, and even the location of your property could significantly impact your income.

  • You might not make a profit.

Buying and maintaining a property can be expensive, so there's always a risk that you won't make a profit by the time you need to sell.

PENSION
  • Your pension is usually invested in the stock market

Unless you've got a defined benefit (e.g. final salary) scheme, the value of your pension will generally depend on the performance of the underlying investments. Investments go down and up in value, so you might not get back as much as you put in.

  • Diversification can spread your risk.

Most workplace pensions are automatically invested in a default fund. Funds can invest in various types of underlying assets, such as shares, bonds and property, depending on the fund's investment objectives. This helps to spread investment risk.

Depending on your pension type, you could choose your own investments to match your personal goals, interests and attitude to risk.

Tax

PROPERTY
  • Capital gains tax(CGT)

You might have to pay 18% or 28% in CGT on any property value increase when you come to sell. For tax year 2023/24, the Annual Exempt Amount is £6,000. This will drop to £3,000 from April 2024 (subject to the lifetime allowance).

  • Income tax

You'll pay income tax at your marginal rate on rental income.

  • Stamp duty on residential properties

Stamp duty will typically apply to all residential properties above £250,000. Tiered rates are then applied to amounts above this threshold. If you're buying additional residential properties, in all cases you'll pay an additional 3% on top of the rates for a primary residence. Keep in mind that rates and thresholds are different in Scotland and Wales.

PENSION
  • Your pension is a tax-efficient wrapper

There's no UK income tax to pay on any dividends or interest from investments within your pension. Any growth is free from capital gains tax.

  • Up to 25% tax-free cash at retirement

You can normally access your private pension at 55 (57 from 2028). At this point, up to 25% can usually be paid tax-free, with the remainder subject to income tax. Tax rules can change, and any benefits will depend on your circumstances.

  • You can determine your taxable income.

Only taking the money you need can help reduce the tax you pay, as can spreading your withdrawals across different tax years.

Cost

PROPERTY
  • House prices continue to reach record-breaking highs

As of December 2021, the average price of a property in the UK was £289,819. Up 6.3% from the previous year. Houses have become less affordable and more expensive in real terms. For example, in 1995, houses cost around four times the average salary. By 2022, it had shot up to nearly nine times the average salary.

  • Mortgages could cost more than you expect

With fluctuations to the Bank of England Base Rate, if your property is mortgaged, you could see significant increases (or decreases) to your mortgage payments, affecting your rental income profit after you've covered all your costs.

  • Additional costs to buy and move

Solicitors, surveyors and estate agents all take their cut before you've even started. You may also have to factor in renovation costs. However, some great finance products, such as bridging finance, can be leveraged to fund this type of work.

  • Ongoing costs for buy-to-let

If you rent your property, you'll have ongoing maintenance costs and letting agents fees (if you use them). Some of these costs will be tax-deductible for buy-to-lets.

PENSION
  • You don't need much money to get started

Unlike a property, you don't need a massive lump sum. You can save little and often. If you're working, you'll probably pay a little bit from your salary into a workplace pension each month, along with your employer.

  • Check your ongoing charges are worth it.

Your pension provider will charge ongoing fees. And if your pension is invested, there will be management fees, too. Contact your pension provider or check your paperwork if you're unsure what your charges are.

Practicalities

PROPERTY
  • Don't underestimate the stress, time and effort involved

Buying and selling a house is a drawn-out process with many moving parts. You have to juggle estate agents, solicitors and mortgage lenders.

  • Buy-to-let can be a hassle and costly over the long term.

Being a landlord can be like running a small business. You'll need to keep up with maintenance, repairs, and insurance. As you get older, you may decide this is more hassle than it's worth, unless you pay a letting agent to manage the property on your behalf, in which case there will be a fee. 

  • Selling often means overhauling your life.

Relying on your property for retirement income ties your financial future to where and how you'll live. But it's unlikely that you'll want to sell your property while you want to finish work. You might have to sell at a price you're not happy with or delay retirement.

  • Downsizing is an emotionally charged decision.

Like one in three people, you may become put off by downsizing because, in reality, you're too attached to your family home. And a smaller property could mean less space for family and friends to visit.

PENSION
  • Automatic enrolment does the hard work for you.

If your employer automatically enrols you, they'll contribute every month – and you probably will, too. Plus, your money will likely go into a default fund to help it grow. Remember that all investments go down and up in value, so you could get back less than you put in.

  • Your pension is your responsibility.

The state pension alone is unlikely to be enough for a decent retirement. So it's your job to make up the rest. You can do this by checking that you're paying enough for your private and workplace pensions and regularly tracking your investments. 

  • Keeping track of old pensions.

With every new employer comes a new pension. So, it can be challenging to track how much you've saved and where everything is. To make life easier, you could consider transferring and combining your old pensions into one Self-Invested Personal Pension.

Before transferring a pension, check to see if there are any exit fees or valuable guarantees you might lose. While your transfer is taking place, it's very unlikely you'll be able to make changes to your investments. This can mean missing opportunities to buy or sell.

Not sure what the best route is for you?

Or maybe you need more guidance before investing in property or a pension?

At Ramsay & White, our team of property finance experts and wealth advisers have a broad understanding of both areas. We can help you analyse your current situation and develop an investment plan to reach your financial goals. 

Please speak to our team today to find out more. 

THE VALUE OF YOUR INVESTMENTS MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED. PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

This guide is for your general information and use only and is not intended to address your personal investment requirements. The content should not be relied upon in its entirety and shall not be deemed to be, or constitute, advice.

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Related Resources:

Property vs Pension: Key Considerations for New Investors

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