Pension vs. property: which is best for your retirement?

A pension and property can provide long-term returns to fund your retirement – but which is the best bet?

People will “spend years poring over this question” as they approach retirement, said The Telegraph. “The right decision could mean the difference between thousands of pounds in income,” added the newspaper.

Research published this year by Standard Life suggested that baby boomers – those born in the post-war years between 1946 and 1964 – “greatly favour” funding their retirement with their pension. Meanwhile, more of those in Generation Z – people born in the late 90s and early 2010s – plan to use a property as their main source of income.

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Both routes have pros and cons. Here is what to consider

Return on investment

Property prices have boomed in recent decades. This “has given rise to the idea of a home not just as a castle”, said City A.M., “but as bonafide crock of gold which can be used as an alternative to a pension”.

The average UK property was worth £91,199 at the end of 1999, according to the Halifax House Price Index. By May 2023, this had risen to £286,532.

That is a return of 214%. Plus you will get a “pretty steady income”, said NerdWallet, if you rent it out. It therefore may not be surprising that some retirees will be attracted to bricks and mortar to fund their later years.

In contrast, a pension lets you put money into the stock market by investing in funds and shares. You will benefit from investment growth as well as compound interest, explained Unbiased, where “the interest itself earns more interest and the whole pot grows faster”.

Property may feel more tangible but pensions have actually “trumped” bricks and mortar over the past 25 years, said This Is Money. The personal finance website cited research from Schroders showing a property worth £100,000 25 years ago would be valued at an average of £454,000 as of February 2023.

In contrast, if you invested £100,000 in the global stock market through a pension, it “would have swelled to around £631,000”.

Tax considerations

There are tax benefits to investing in a pension. Contributions get tax relief, which is where “some of the money that would have gone to the government as tax goes towards your pension instead”, explained MoneyHelper, therefore boosting how much you are putting into your retirement savings.

Additionally, there are no income or capital gains tax charges on money invested in a pension, which can make a “significant difference” to the value of your pension pot over the years, said Unbiased.

There may be tax to pay once you access your pension. The first 25% of a withdrawal is tax-free but the rest is taxed as earnings. As a result, the more money taken from a pension pot could result in a higher tax bill.

In contrast, landlords need to pay an extra 3% stamp duty charge when buying an additional home, plus changes to mortgage interest tax relief have “reduced profits for property investors”, explained NerdWallet. Landlords also have to pay income tax on rent and there may be capital gains tax to pay if you sell a buy-to-let property and it has increased in value.

This suggests that when it comes to tax, added Unbiased, “pensions win hands-down”.

Costs

You don’t need a large sum to start a pension but there could be management, platform, fund, trading and adviser fees to pay.

While these fees might at first seem small, they could mount up when considered together.

The costs of buying a buy-to-let property can also “rack up”, warned Rest Less. These include the deposit, stamp duty, and legal and valuation fees.

What are the risks?

As with any investment, the value of an asset, whether it is a pension or property, can drop.

Property is seen as the classic “passive income”, said Frazer James, but you will still have the “hassle” of maintaining it, dealing with estate agents and missed rent payments. Pensions are “less hassle”, added the advisory firm, but they also need to be monitored.

A downside of a pension is that you cannot access it until age 55.

In contrast, you can receive property income from any age but “if you’re unlucky and need to sell during a dip”, warned NerdWallet, you could end up with less than you had hoped.

Strike a balance

Solely investing in property or a pension for retirement could prove to be a “risky strategy”, said RestLess, as it is always “considered sensible” to avoid relying on a single asset or investment.

For this reason, it can be worth seeking professional financial advice if you are unsure which route is best for you and to understand how each option works.

A pension is the “most cost-effective and straightforward option” for most people, said NerdWallet. But if you have a passion for property, “there is nothing to say you can’t do both”.