Should I invest in property or my pension?
Property is an expensive investment. Pensions are supported by government tax relief, employer contributions and more. Both can help fund your retirement.
House prices in the UK have soared over the past two decades. At the end of 1999, the average property was worth £91,199, according to the Halifax House Price Index, while as of February 2022, the typical house costs £278,123.
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 purchase 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.
» MORE: How to plan for retirement
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 been forced to pay 3% more stamp duty (across all bands) when they buy rental property than home buyers.
Changes to mortgage interest tax relief since 2017 have also reduced profits for property investors - with new rules meaning they can only offset 20% of their mortgage interest costs in their tax return. 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, and following a recent change, investors must now declare gains within 30 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.
» COMPARE: Pension rates
Pensions: the pros and the cons
- 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
- Changes to pensions in 2015 mean you now have more options as to how you use your pot
- 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)
- 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
- 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
- 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
- Forms part of your estate when you die, making it potentially subject to IHT
» MORE: How to invest in property
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.
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Rachel Lacey is freelance journalist with 20 years experience. She specialises in personal finance and retirement planning and is passionate about simplifying money matters for all. Read more