Financial planning

property v pension

Colin Dyer

‘Property is my pension’ – so say the UK public but the reality is they could be missing out. And, according to recent statistics, this belief is more popular than it has been in years.


When non-retired UK adults were asked which method of saving for retirement they think makes the most money, nearly half thought property would give the best returns. The UK has long had a love affair with the notion of owning a property, with a second buy-to-let property considered the pièce de résistance – and this concept seems to be growing in popularity.

The popularity of property

I understand why many people have that view. A pension is intangible and, for many people it’s an ‘in-the-future’ concern, whereas ’bricks and mortar’ is physically sound. Although like any investment it can depreciate in value, it’s not physically going anywhere, it’s a tangible asset.

The UK property market is currently strong and so property as a long term investment often seems like a no-brainer. Over the past five years, the average house price in the UK has risen from £170,335 to £225,047, an increase of 32%. If a buy-to-let is the way you’re looking to go, the rental market is seemingly similarly lucrative. The average rent in the UK is now £918 per month. In London, this is around £1588 per month. This could provide you with a regular, monthly income to help fund your retirement.

This all sounds financially rewarding so it’s no wonder it’s a popular choice. However, just because it’s popular doesn’t necessarily mean it’s the right thing for everyone.

The benefits of a well-planned and well-invested pension can have a big impact on your retirement future. Like any investment, the value of your pension can go down as well as up and may be worth less than paid in, but there are many important factors to consider before you resign your retirement future to your property.

Tax breaks and pitfalls

There’s no getting away from tax and it’s one of the most important factors to consider when planning your future. If you’re thinking about funding your retirement with a second property it’s important to remember that capital gains on a second property are taxed at a higher rate than gains on other assets, such as shares. And on top of that you’ll have to pay income tax at your highest rate on any rent collected.

Meanwhile in the investments world, rules around investing in pensions and ISAs have become much more flexible in recent years.

Pensions offer many tax advantages:

    • You get tax relief at your highest rate on contributions
    • You don’t have to pay capital gains tax on the money you make
    • There’s no income tax to pay while the money is in your pot
    • Normally you can take the first 25% of your pension pot completely tax- free
    • You can keep your remaining pension pot invested so it has the potential to grow in value tax efficiently, although there are no guarantees
    • A modern pension is outside your estate and is protected from inheritance tax

Of course, tax rules can always change and what it means for you will depend on your individual circumstances but due to the tax benefits pensions offer, buy-to-let investments start from a disadvantage.

Concern that ‘people buying a home to let should not squeeze out families who cannot afford a home to buy’1 has brought about changes to tax. This means it is more expensive for you to buy a second property as you’ll need to pay a higher rate of stamp duty. Tax breaks on buy-to-lets are also being cut, with less tax relief for mortgage interest.  That means that any borrowing you need to do is more costly.

Passing it on?

For inheritance tax purposes, a property is inside your estate, which could mean 40% tax is due when you die. Your modern flexible pension is not, and can be passed on entirely free of income tax, depending on your age when you die. If passing on wealth to your loved ones is important to you, this could make a huge difference.

There’s also the question of how quickly your loved ones could access your money after you’re gone. To realise the full value of your property involves finding a buyer and waiting for probate, which could take a long time. Your loved ones are likely to be able to benefit from your pension savings a lot quicker, assuming you’ve nominated who you want to benefit.

Cashing in?

Property as a buy-to-let or a long term investment can be a lucrative source of funds in a strong property market. However, income from property is not flexible, which is an important factor to consider in case life throws up any unexpected surprises.

With a fixed monthly income coming into your account from your tenants each month, it could be hard to drum up extra funds if they’re needed. There’s also no guarantee you will have tenants in your property each month; you need to be comfortable that you can manage without the income and still meet any payments, such as mortgage repayments.

Furthermore, the sale of your property can be a long and complex process. If you need to sell your property quickly to get your hands on your money when it matters, this could be very difficult without significantly reducing the sale price.

A modern pension in contrast is a very flexible option. You can start, stop, increase and decrease your withdrawals after the age of 55 (although this age may increase in the future.) This is known as income drawdown and provides you with a greater degree of flexibility in retirement.

It’s a good idea to have a well thought out plan in place for your pension if you’re going into drawdown to help ensure your retirement savings remain on track and that you don’t run out of money.

Don’t bet on buy-to-let – diversify and spread your risk

When the property market is booming, it often looks like a buy-to-let or an investment property could hold the key to a secure retirement.

But if you’re only invested in property then you could be exposing yourself to a lot of risk. That’s why it’s key to invest in a way that spreads your money across a diverse range of investments to get the best balance between risk and return. Many people choose to use property investments in conjunction with other more easily accessible and flexible investments, such as pensions (easily accessible once you’re over 55) and ISAs.

You also don’t have to own your own property to gain exposure to the property market. You can invest in property funds through your pension. Although it can take longer to cash-in funds invested in property, you could potentially benefit from property market returns without the hassle and cost of managing a property and paying a hefty deposit – the best of both worlds you might say.

Looking for help with your retirement plan?

If you don’t currently have an adviser, we’d be delighted to help you look after your finances. Get in touch for a no-obligation consultation with one of our financial planners to see what we can do for you.

We can also help you spread the risk as diversification is a key element of our approach to investing. The 1825 Portfolios benefit from specialists being involved at every stage of the investment cycle – from setting the strategic asset allocation, to carefully selecting investment funds based on expert research. Both the underlying investments and asset allocation are actively managed to help make sure that the portfolios meet clients’ financial planning objectives.

When it comes to tax, how you’re treated will depend on your individual circumstances. Your 1825 Financial Planner is up to date on the latest rules and can advise you on how to make your financial plan as tax efficient as possible for your personal situation, so please get in touch if you have any questions.


1George Osborne, Spring Budget 2015


Laws and tax rules may change in the future and the information here is based on our understanding in May 2018. Investments can go down as well as up meaning you may get back less than you put in. The information in this blog should not be regarded as financial advice.