Prioritising property or pension: which is best for retirement?

07/07/2021

Investing in property is a favoured strategy in the UK, with around a quarter of Brits viewing it as the safest way to save for retirement.

There are various benefits to including property in a retirement strategy, giving you a tangible asset that can rise in value. You also have the possibility of drawing extra income by renting it out.

However, property can also be an expensive and illiquid investment that adds more complications to your retirement strategy than it does benefits. As a result, there’s much debate over whether investing in property or pension is the best way to create a secure retirement portfolio.

So, how does property stack up as a retirement investment against a traditional pension?

Property’s performance over the past 10 years is varied

As an investment, property’s performance over the past ten years has been varied. Slow, steady growth has been underpinned by a couple of unpredictable swings in value.

Statistics from Royal London provide an interesting insight into how property ranked against other investments from 2010 to 2019 in terms of annual returns. You can see property’s returns compared with UK and global stocks below:

In 2011, 2013, 2015 and 2017, property finished as the highest performing investment of the three types, achieving total returns of 47.1% across the period.

However, in half of those years, property lagged behind, even finishing bottom in 2016 with no gains in value.

Consider this performance against pensions. Pension managers typically invest across a diversified portfolio of UK and global stocks, so we can use these figures as a rough proxy to estimate how pensions would have performed.

Global stocks performed well over the past ten years, coming top of the pile five times. Across the period, they offered total returns of 104.2%.

Meanwhile, UK stocks paint more of a mixed picture, narrowly outcompeting property with total returns of 56%.

While property’s returns are by no means poor, the figures do lean slightly in favour of pensions.

Of course, this doesn’t mean pensions are entirely risk free. Funds can rise and fall in value, and you may get back less than you invested. This could affect your pension income in retirement.

Property is not particularly tax-efficient

One big advantage of pensions is that they’re tax-efficient, receiving tax relief on contributions up to the Annual Allowance. Any growth on your pension investments is also free from Income Tax and Capital Gains Tax.

However, property can be subject to a couple of taxes, both when you buy and sell:

Stamp Duty Land Tax (SDLT)

SDLT is the tax due on any property purchase in England. The amount you pay depends on the value of the property.

Currently, there’s a SDLT holiday in England to encourage homebuying in a difficult climate. Ordinary rules will begin again from 1 October 2021, when the rates of SDLT will return to their usual levels, as detailed below:

Investing in property means you’re most likely buying a second residential property or buy-to-let, so there’s an additional 3% SDLT to pay. This also applies to the first £125,000 of the property.

As a result, SDLT could add several thousands of pounds to your property purchase.

Capital Gains Tax (CGT)

When you come to sell your property, you may have to pay CGT on any profits.

Each tax year, you have a personal annual exempt amount from CGT, which for 2021/22 is £12,300. However, any profits made over this threshold could be subject to CGT.

Under current rules, basic-rate taxpayers pay 18% CGT on gains made on residential property, with higher- and additional-rate taxpayers paying 28%.

A tax on the profit you could make from selling your property could reduce the sum you’d receive. If you were planning to live off the money generated by a property sale, this could impact your standard of living.

Property can be expensive to buy, maintain, and access

On top of tax, property can be associated with a range of other costs.

There’s the cost of the property itself, as well as the repayments you’ll have to make if you’re buying with a mortgage. There may be mortgage broker and estate agent fees to pay too.

If you’re buying-to-let, you may also need to consider costs of maintenance, insurance, and repairs if anything breaks during the tenancy.

When it comes to accessing your money, property is an illiquid asset. To draw income from the rising value of the property, you’ll need to sell it. This puts you totally at the whim of the market, both for whether you can find a buyer, and whether you’ve made any profit on your initial investment.

This is less of an issue if you’re using property as a way to pass on wealth to your family. But, if you’re relying on property investments to provide income during retirement, bear in mind that this may not be all that straightforward.

Meanwhile, thanks to Pension Freedoms, it’s possible to access up to 25% of your pension pot tax-free as a lump sum when you retire. This makes them a more attractive prospect if you’re intending to use a lump sum to move home or travel when you stop working.

Your pension is the foundation your retirement is built upon

Overall, while property does have its disadvantages, it can offer you a strong, stable asset that can achieve good returns in the long term – provided that it doesn’t mean you neglect your pension entirely.

Realistically, your pension is the foundation for your entire retirement strategy, offering you a secure savings pot to draw income from. The tax-efficient benefits of pensions make them a powerful tool when it comes to saving for your future.

With that foundation in place, carefully chosen property investments can be a great choice to diversify your retirement portfolio.

You may need multiple properties to make it worthwhile, but investing in bricks and mortar could provide you with some extra income. Or, it could act as a way to make sure your family inherit as much as of your wealth as possible.

Wondering if property is right for you?

If you’d like to know how property could form part of your retirement strategy, get in touch with us at Douglas White. Email info@douglaswhiteltd.com or call 0151 345 6828 to speak to one of our experienced advisers.

Please note:

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.