Rachel Lacey
House prices in the UK have soared over the past two decades. At the end of 1999, the average UK property was worth £91,199, according to the Halifax House Price Index. By February 2023, this had risen to £285,476.
It’s not surprising then that people look to bricks and mortar as an alternative to a pension. In addition to strong capital growth, property can also give you a pretty steady income if you rent it out.
Here, we take a closer look at property investment and ask whether it could make a practical alternative to a pension and help fund your retirement.
How property can fund your retirement
You’ll often hear people say their property is their pension. People without adequate pension savings may plan to sell their current home and downsize – using the equity released to fund their retirement.
Alternatively, property investors can buy one or more properties and use those assets to fund their retirement. A steady stream of rental income could potentially replace or supplement pension income, or properties could be sold and the proceeds used in lieu of a more traditional pension fund.
However, while you might think investment in property is ‘as safe as houses’ – it may not be as easy as it looks.
Why a pension may make more sense
Property is an expensive investment. Unlike pensions, where the government incentivises saving with tax relief, tax-free growth, tax-free lump sums and compulsory employer contributions, property investors are discouraged by fiscal policy.
Property investors for example, pay higher rates of stamp duty. Since 2016 they have paid 3% more stamp duty (across all bands) when they buy rental property than home buyers.
Since 2017, changes to the way mortgage interest tax relief is given has also reduced profits for property investors. Current rules mean investors can only get basic rate tax credit, instead of reducing the amount of rental income they declare at additional rates of tax.. This move alone has encouraged many landlords to sell up.
There’s often capital gains tax to pay when you sell investment property too – this can take a sizeable chunk out of your profits. Investors must also declare gains within 60 days of a property being sold, rather than waiting until they next need to submit a tax return.
Even after tax, property investors have lots of costs to contend with from letting agent fees to insurance and maintenance, not to mention the risk of periods where you don’t have tenants, or worse, tenants that don’t pay the rent.
How much you can make from a property – and the speed at which you can sell it – will also depend on the state of the housing market when you need to sell. If you’re unlucky and need to sell during a dip you may need to defer your sale until the market recovers or sell for less than you had hoped.
That isn’t to say property investment can’t fund your retirement. The key is to be aware of how both pensions and property investment compare to enable you to make an informed choice. For most people, a pension is the most cost-effective and straightforward option – but if you have a real love of property, and relish the opportunity to manage one or run a portfolio, there is nothing to say you can’t do both.
Pensions: the pros and the cons
Pros:
- Tax relief and employer contributions can give your pot a substantial boost
- You can control where your money is invested and make changes quickly and easily
- You can take 25% of your pension tax free
- Your pension typically falls outside of your estate for IHT purposes and can be paid tax free to beneficiaries if you die before age 75
- Management costs are low (compared to property)
Cons:
- You cannot access your money until you are 55 (rising to 57 in 2028)
- A workplace pension may not offer a wide choice of investments
- They can be complicated and subject to frequent rule changes
Property: the pros and cons
Pros:
- Property is a tangible investment that has seen huge growth in recent decades
- Offers a combination of capital growth and rental income
- You can sell properties whenever you need the money
Cons
- You could lose money if you need to sell during a house market crash
- Property is not always easy to sell
- The cost of running and maintaining property can be high
- Buying and selling property may be expensive and not very tax-effective
- More of your retirement income will be tied into property which means you may lack diversification, you may need multiple properties in different areas to reduce risk
- Could form part of your estate when you die, making it potentially subject to IHT
WARNING: We cannot tell you if any form of investing is right for you. Depending on your choice of investment your capital can be at risk and you may get back less than originally paid in.
Image source: Getty Images
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