My property is my pension: is this view sensible?

Property is historically a solid investment choice, yet despite the value growth that many homeowners relish, pensions still tend to represent less volatility when it comes to financial security in retirement.

In an ideal world, one would not need to sacrifice one for the other and choose between property vs pension, but rather rely on a combination of the two to maximise savings.

If you’re of the opinion that your property is your pension, a fairly popular belief, then it’s worth thinking about the pros and cons that investing in a pension or property has to offer you.

Read on to find out is property or pension a better investment.

Property: pros and cons

In the UK especially, property proves repeatedly to be a sound investment choice due to its consistent increase in value. This is partly due to the competitive housing market and the high demand for buy-to-let properties. Plus, slumps don’t tend to last very long, and property bounces back, resulting in a great investment choice for those looking to find a good return when they come to sell.

On the other hand, a large return on investment is never guaranteed, and focusing all your investing power on property is likely not a diverse enough method of maximising your money.

Moreover, tying all of your assets up in property may leave you in a tricky situation if you need quick access to your money. This lack of liquidity can be a major issue when you’re attempting to access an income for your retirement.

If you plan to rely on money from renters to fund your retirement (which can be doable), you’ll need to think about the pros and cons of acting as a landlord in later life – it can end up costing you money and diminishing your cash flow over time, particularly if you need to make consistent repairs.

Pensions: pros and cons

There aren’t many cons to investing in a pension when choosing between property or pension, if any, other than the fact that you won’t usually be able to access your savings until you’re at least 55.

Pensions carry a wealth of superb benefits that make them unique, most notably in the form of tax relief.

Paying into a pension essentially means you make money, as the government tops up your contributions by at least 20%, depending on which tax bracket you’re in.

Pensions also benefit from compound interest, a factor that has the potential to greatly build your wealth over time, so the sooner you invest into it, the more opportunity the compounding effect (interest on your interest) has to get to work.

One other possible con is that a pension is still invested in the stock market, meaning it may perform badly and result in a shortfall (having less money than you thought you would when you come to withdraw it), but it’s still nowhere near as risky as most other investments.

Which will bring in more money in the long run?

In short, it depends on the way you decide to invest. Carefully planned property investment can yield a huge return in the long run. For example, in April 2022, UK house prices were up by a whopping 12.4%.

Property is considerably more volatile than pensions, however, and there’s every chance that you’ll incur some high costs if you plan on renting out your property.

Pensions are almost risk-free, and even if you are able to make big gains on your property investments, they may not result in bringing in more money than pensions will in the long run – this is down to the way in which property is taxed when compared to the tax relief benefits of the pension.

Which is better for tax?

Pensions are undeniably better for tax, as the tax relief they offer can make you money on every contribution (up to 100% of your income, or £40,000 per year). When you combine this with compound interest and employer contributions, your savings can quickly grow in value.

Should you use your house as a pension?

Many people decide to bolster their pension income using equity release (taking out cash against the value of the home), downsizing, or renting out their free rooms.

That said, your house shouldn’t be used in place of a pension, as a pension provides many outstanding benefits that ensure a steady income in retirement.

Conclusion

It’s best to avoid investing in property if it prevents you from building a pension pot, but there’s nothing to stop you from avoiding property investment altogether, as a diverse investment portfolio can offer you the best returns over time.

Disclaimer 

The content of this article is for general information purposes only and should not be construed as legal, financial or taxation advice. You should not rely on the information contained in this article as legal, financial or taxation advice. The content of this article is based on information currently available to us, and the current laws in force in the UK. The content does not take account of individual circumstances and may not reflect recent changes in the law since the date it was created. It is essential that detailed financial and tax advice should be sought in both jurisdictions and any legal advice, if required.

This notice cannot disclose all the risks associated with the products we make available to you. When making your own investment decisions it is important you understand that all investments can fall as well as rise in value and it is possible you may get back less than what you have paid in. You should also be satisfied that any investments you choose are suitable for you in the light of your circumstances and financial position. You should seek financial advice if you are not sure of what’s best for your situation.