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'My house is my pension.' The pension vs property debate

The number of people who prefer property is on the rise. We look at the benefits and drawbacks of both.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

When it comes to saving money for retirement, the number of people who prefer property to pensions is on the rise. That’s despite the government tightening the tax burden on buy-to-let landlords. 

Today we’ll take a look at the benefits and drawbacks of both.

Investment growth

It’s been well publicised that property has been on the receiving end of some extraordinary growth over the years.

UK house prices have far outstripped inflation – the general rise in price levels – by some 3% a year since 1955.

But the UK stock market has grown faster still, gaining investors on average over 6% above inflation over the same time period. 

The figures were calculated by Numis and London Business School. They exclude rental and dividend yields and don’t factor in the costs of investing in each.

Rental income or dividends?

With buy-to-let property, you get the double whammy of ongoing rental yields alongside inherent appreciation in value. With the average rental yield in England and Wales around 5.9%, this gives you a regular income with the prospect of additional profit over the long-term.

By contrast, the FTSE All-Share currently offers a prospective dividend yield of 4.3% (variable, not a reliable indicator of future income).

Of course, both yields are averages and tend to fluctuate, so it’s worth keeping an eye on them. Properties in certain parts of the UK are likely to generate a higher or lower yield, just like certain businesses that are listed on the stock market can offer higher dividend yields than others.

Inheritance tax benefits

Property counts towards your estate which means it will be subject to inheritance tax.

A pension, however, can be claimed tax free by your beneficiaries if you die before 75. If you’re older than 75 when you die, your pension still isn’t usually subject to inheritance tax, but your beneficiaries would pay income tax at their marginal rate.

Time is money

You’re free to sell your house whenever you like, with the option of investing that money somewhere else. You might have to pay 18% or 28% in capital gains tax on any increase in the value of the property. Whereas once your money is inside a pension, you can’t usually access it until 55 (57 from 2028). At this point, you can usually take up to 25% tax free and the rest you’re free to take how you like, but it will be taxed as income.

Property can be time-consuming and requires a lot of effort. Finding tenants, handling the bad ones (and their pets). Dealing with letting agents, arranging (re)mortgages, tax returns, maintenance, repairs, decoration, and insurance. Buying and selling is costly and can also be drawn-out. In some ways, if you have more than one property, it can be like running your own small business.

A pension on the other hand is a pretty relaxed affair and in our opinion, it should be the first thing most people consider for their retirement saving. Every UK resident under 75 qualifies, even children and other non-taxpayers, and when you add money, you get a boost from the government of up to 45%. It's one of the most generous tax perks available and the main reason why so many people put money in a pension in the first place.

Remember, tax rules can change and benefits depend on personal circumstances.

Unfortunately, most traditional pensions don’t give you the flexibility to invest where you want to. And it’s not always easy to see or understand what’s happening with your money.

Certain types of pension, like a SIPP (self-invested personal pension), let you choose all your own investments from a large selection. The HL SIPP also makes it easy for you to manage your pension. You can see how it’s doing online at any time, making changes whenever you like. In some cases, buying or selling the investments in your pension can only take seconds. That can ultimately help determine how you enjoy your retirement.

The real risks

With the freedom and flexibility of a SIPP also comes responsibility. You’ll need to be comfortable making your own investment decisions. And there’s always risk with investing – the value of your investments can go down as well as up, so you could get back less than you put in. This means a SIPP might not be right for everyone.

Just like the stock market, the value of property can fluctuate. If you buy property with a mortgage, you are at risk of finding yourself in negative equity if house prices fall.

Tax benefits on property also aren’t as generous or rewarding as they once were, and mortgage providers are introducing stricter criteria before lending.

Pension or property?

It’s not necessarily a case of one being better than the other. Both have their advantages and disadvantages, and what’s right for you will depend on how comfortable you are with the risks of each.

Investing is all about distributing money in order to benefit from a decent return at some point in the future, and there’s no reason property and pensions can’t complement each other as part of a diverse investment portfolio.

Introducing the HL SIPP

If you’ve made the decision to make a pension contribution and save tax – that’s great news. If you’re happy choosing your own investments, the HL SIPP might be the right pension for you.

More about the HL SIPP

This article is not personal advice. If you're not sure whether an investment is right for you, we can put you in touch with an adviser.

If you have got any questions about SIPPs, please don’t hesitate to call our helpdesk on 0117 980 9926 or send us an email.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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