Property or Pension?

Before we begin any discussion, let us be quite clear – both property and pensions can deliver long-term growth, both can be used to fund retirement, and both can play an important role in savings.

In the UK, property has long been seen as a good investment, with house prices beating inflation by 3% per annum on average since 1955.  The recent pandemic has seen house prices rise dramatically again, fuelled by the current economic environment with ultra-low interest rates, with a large number of investors building property portfolios.

Buy-to-Let properties remain popular as demand continues to outstrip supply.  The combination of rental yields and capital growth offers both immediate and potential long-term profit.  However, a raft of regulatory and tax changes has made Buy-to-Let less lucrative over the past few years, but the appeal of an investment that is real and tangible will always exist.

Although it is tempting to just look at the gross rental yield, you also have to consider the effects of personal taxation, maintenance, and repairs on the property, as well as possible void periods eating into the yield.

The main concern when it comes to property is liquidity. Selling a property can take many months, so if you are relying upon the proceeds at any time, especially at retirement, then planning needs to be done early.  Moreover, unlike a pension, you are unable to sell the property in parts.

Although property has done well, the UK stock market has doubled that rate of return over the same period of time.

This means that a backup plan which includes equity-based investments, often in the shape of a pension, is a good idea.  When investing in a pension, there is tax relief available upfront, meaning there is an immediate uplift in the investment, and the compounding effect on that increased investment begins immediately.

A drawback of a pension is that you cannot access it until age 55, but you can then take up to 25% of the fund as a tax-free Pension Commencement Lump Sum (PCLS).  Some would also argue that pensions have a higher regulatory standard with the help of the FCA.

The best course of action is therefore likely to be a mixture of the two types of investment.  Pensions are less taxing in two ways.  Firstly, they can be left alone, whereas property investment is far more hands-on.  Secondly, many higher rate taxpayers have found that the net yields on recently bought property investments are now much lower.

The sensible answer is to develop an overall strategy with your Wealth Strategist and to work through the advantages and disadvantages in advance.  If you would like to discuss your own situation with one of our expert Wealth Strategists, then please get in touch.