Pension or property - which should I invest in?

This article was last updated on 19/08/2024

Since 2018 it’s been a legal requirement for all employers to offer a workplace pension, ensuring that no one retires without one. But many people continue to invest in property too, hoping it will boost their retirement income. In this article, we explore the differences between investing in pensions and property to find out which approach might be suitable for you.

Investing in a pension

Pensions are specifically designed to support you through retirement. Unless you have the largely discontinued defined benefit pension (where an employer would typically pay into it for you), both you and your employer will pay money into your pension while you’re working. Your pension provider then invests that money into a range of stocks and shares that they expect to increase in value over time.

By the time you retire, your pension should be large enough to live off for several decades. Unlike the State Pension, which currently requires you to wait until you’re 66 (rising to 67 in 2028), you can usually access your workplace pension from as early as 55 (rising to 57 in 2028).

Pensions are one of the most tax-efficient ways to save; not only will the government provide tax relief so that you only need to pay in 80p per £1 added to your pension, but you can withdraw 25% of it tax-free when you retire. As a result, pension providers are currently looking after £2 trillion worth of investments on behalf of savers in the UK.

The more you put into a pension, the more it will be worth when you retire. But with so many other ways to invest your money, it’s worth understanding the benefits and the downsides of putting all your savings into a pension.

Pension retirement options:

• take some of it as cash and leave the rest invested;
• take 25% of it as cash and buy an annuity with the rest;
• take smaller amounts as and when you need it;
• take all of it as cash (and face a high tax bill); and
• a mix of these options.

Financial benefits of a pension:

• your employer will pay in at least 3% of your qualifying earnings;
• the government will provide tax relief of at least 20%;
• you can take out 25% of it tax-free when you retire;
• if you start investing when you’re young, you’ll benefit from compound interest;
• there are lots of ways to spend your pension when you retire (see list above); and
• you can move your money between different pension providers if you find a more suitable or competitive plan.

Financial downsides of a pension:

❌ you can’t access it before 55 (rising to 57 in 2028) without a hefty tax penalty;

❌ you can’t pay in more than £60,000 per tax year (2024/25) or 100% of your salary, whichever comes first. This could change in future;

❌ there’s no guarantee your pension will grow, and it could even fall in value;

❌ if your pension doesn’t keep up with inflation, you may find yourself unable to spend as much as you expected when you reach retirement; and

❌ some pension providers charge hefty fees, which can significantly erode growth.

Investing in property

Property has long been seen as an attractive investment proposition in the UK. In the late 1990s and early 2000s in particular, house prices grew at such a rapid rate that many homeowners saw their property double or even triple in value over barely a decade.

But house prices don’t always go up. The 2008 recession saw the average home fall in value by 16% in just ten months, and prices still haven’t recovered in some areas of the UK.

That said, property does tend to increase in value over the long term. And it can earn extra income if you rent it out. So if you’re looking at property to boost your future retirement income, how can you go about it?

Buying your own property

Although many people might not primarily consider it a financial investment, buying a home can significantly increase your wealth over the long term.

For example, a home bought for £84,600 in January 2000 would sell for an average of £278,588 in January 2024. That’s a rise of nearly £196,000 in 24 years (averaging 9.8% growth per year).

If you’re fortunate enough to see your home rise in value by the time you retire, you might be able to turn that value into income in several ways.

Owned property retirement options:

• [downsize to a smaller homeuk/downsizing) and live off the difference;
• release equity for a lump ](/sum of cash;
• rent out a spare room to earn monthly income; and
• buy an annuity with the money freed up for a guaranteed income.

It’s important to note that while these options might sound attractive in theory, they all carry risk. For instance, there’s no guarantee that downsizing will free up enough cash to live on, or that you’ll even want to rent out a spare room by the time you retire. Equity release in particular can be risky, since it involves using the equity in your home to take out a large loan that needs to be paid back.

You can learn more about using your property to fund your retirement, equity release, home reversions and lifetime mortgage in our property and retirement video series.

Financial benefits of buying a home:

• your wealth increases if your home increases in value;
• an increase in value might allow you to release equity to spend in retirement;
• you’re not ‘throwing money away’ on rent;
• you’ll typically pay less per month on a mortgage than renting the same property;
• you could receive financial incentives if you’re a first time buyer; and
• your home can be passed on when you die.

Financial downsides of buying a home:

❌ you’ll probably need to take out a mortgage and pay interest;

❌ you’ll need to put down a large sum of money upfront as a deposit;

❌ if you fall behind on your mortgage, you could lose your home;

❌ you’ll be responsible for maintenance costs;

❌ you’ll lose some financial flexibility as your money’s tied up in your home; and

❌ your home might not significantly rise in value, and could even fall in value.

Buying property to rent out (buy-to-let)

House prices have grown to such an extent over the last few decades, that more people than ever have turned to renting their homes. In 2000 about 10% of homes were privately rented by 2023 this had grown to over 18% about 4.6 million people. The number of landlords currently stands at 2.82 million in 2024.

Between 2005 and 2015, the number of rented properties in the UK almost doubled to around 5 million. And along with rising rents, the number of landlords grew with them, to almost 3 million.

But in 2017 new tax rules came into force that made renting property less lucrative. And in the years since, more than 220,000 landlords have left the buy-to-let game.

So is investing in buy-to-let property an attractive option for retirement?

Buy-to-let retirement options:

• live off the rental income;
• sell one or more properties and live off the cash;
• downsize one or more properties and live off the cash;
• release equity in one or more properties and live off the cash; and
• buy an annuity with the money freed up for a guaranteed income.

Just like with a residential property, none of these options are risk-free. There’s no guarantee rental income will be stable, since you may experience gaps between tenants. And there’s also no guarantee the property won’t fall in value, causing other problems. Finally, should you own a portfolio of multiple properties when you die, anyone you leave it to might have a hefty inheritance tax bill to pay.

Financial benefits of buy-to-let:

• you’ll have a steady stream of income;
• rent could increase if there’s a rise in demand;
• your wealth increases if your property increases in value;
• an increase in value could allow you to afford buying more property (known as leveraging); and
• you’ll get ‘free’ income once your mortgage is paid off.

Financial downsides of buy-to-let:

❌ you’ll need a larger deposit than a residential mortgage (typically 25%);

❌ you’ll have to pay interest on a mortgage;

❌ if you fall behind on your mortgage, you could lose your property;

❌ you’ll need to pay 3% stamp duty on each purchase;

❌ you may not be able to find a tenant, causing a break in income;

❌ you’re responsible for maintenance and renovations;

❌ you’ll lose some financial flexibility as your money’s tied up in property; and

❌ your property might not significantly rise in value, and could even fall in value.

Investing in property funds

You don’t need to buy your own property to own a share of the housing market. Instead, you could invest your money in a share of a property fund. And lots of people do; property funds held a whopping £2.5 trillion in 2018.

The type of investments property funds focus on can really vary; some invest in UK residential property, some in overseas commercial property, some in student accommodation, and some even build their own property.

Property funds present an attractive option for those who either aren’t able or don’t want to provide the large upfront deposit on a property, prefer to invest little and often, or simply want to spread their investment risk across a larger number of properties. But just like any other form of property investment, property funds have their pros and cons.

Property fund retirement options:

• live off the dividend income;
• sell some or all of your shares and live off the cash; or
• buy an annuity with the money freed up for a guaranteed income.

Bear in mind that you’ll need to invest a lot of money into a property fund if you’re to receive big enough dividends to live on. And while property has historically proved a solid long-term investment, there’s no guarantee that this trend will continue.

Financial benefits of property funds:

• you can invest as much or as little as you like on a regular basis;
• your money’s spread across multiple properties, reducing the risk of individual properties losing their value;
• you could gain access to international property markets;
• there are tax benefits if you invest through a SIPP or ISA; and
• your cash flow won’t be impacted by sudden unexpected property costs.

Financial downsides of property funds:

❌ value of shares can fall as well as rise with the property market;

❌ buying and selling shares could be a slow process, limiting access to your money;

❌ funds may prevent withdrawals if too many people try to withdraw at once;

❌ dividends can rise and fall with tenant occupancy rates;

❌ some funds invest in a niche property market (eg. student accommodation) which could be particularly affected by specific market events; and

❌ you’ll need to pay management fees.

Which is right for you?

Here’s a summary of the main differences between investing in pensions and property.

	Pension	Property
Purpose-built for retirement	✓	✗
Investment tax incentives	✓	✗
Invest little and often	✓	✗ (apart from property funds)
Access your money before 55 (rising to 57 in 2028)	✗	✓
No management fees	✗	✓ (apart from property funds)

As we’ve seen, there are plenty of benefits and downsides to each of these options. And while one approach may work for some people, it may not be suitable for others.

There’s no doubt that pensions offer great tax incentives, while property funds spread out the risk of buying individual property. But the right choice will come down to your personal circumstances and goals.

If you’d like to know more about pensions and how PensionBee could help you, get in touch using the live-chat button on the right or call our UK team on 020 3457 8444.

Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.