Is property investment better than a pension?

Property investments and pensions are both great at delivering long-term financial growth. When it comes to planning for your retirement, both could play equally important roles - but is property investment better than a pension? In this article, we’re going to look at the pros and cons of each to provide an insight into how you could fund your future.

Which is better: investment or pension?

The beauty of property is that it provides you with real, tangible investment. There’s a certain permanence about owning an asset that isn’t just numbers on a printed statement or computer screen, and this perhaps explains which property investment is so popular in the UK. 

Some people are concerned about the unpredictable nature of the financial markets - particularly during times of recession or uncertainty (take the coronavirus pandemic, for example). For these people, it makes more sense to invest in property as opposed to squirrelling money away in a pension. Investing in property can be as simple as owning your own home, or as complex as taking on a large and varied portfolio of buy to let property. But what are the advantages?

Pros of property investment

The beauty of being a buy-to-let landlord is that in addition to rental yields, you can also enjoy watching properties potentially increase in value before delivering significant profits when you decide to sell to fund your retirement.

This combination of immediate income and long-term house value appreciation provides both convenience and security for the future. Property has been one of the most reliable investment classes over the last few decades.

House prices have increased by 353% since 1992, and many buy-to-let investors have created property portfolios worth hundreds of thousands or even millions of pounds during this time. As well as capital growth, investors holding property during this time would have received considerable annual investment yields from rent.

Cons of property investment

Like all investments, property carries a risk. While house price increases can deliver great returns, there’s no guarantee that you’ll make a profit in terms of capital growth.

There’s also no guarantee with rental yields, either: while you might expect to enjoy a regular rental income from a property, you’ll also have to factor in ongoing costs like repairs, maintenance, tax, insurance and other applicable fees. Although the gross rental yield should cover these expenses, there is always the risk of an unexpected much larger expense.

Property is also a more active investment than a passive pension investment in the financial markets. As the landlord of a property your input will be required from time-to-time, and this is true even if you have an agent to help.

Finally, illiquidity is one of the biggest downsides with property. It can be slow to realise your investment when needed. During difficult market spells, property sales can take months or even years. If you’re planning to rely on the proceeds of your property investment for your retirement, you’ll need to be well-prepared. You’ll also need a backup plan in case you struggle to sell, or if the housing markets crash. Stocks on the financial markets, on the other hand, can virtually always be sold same-day.

Can I withdraw my pension and invest in property?

Since 2015, it has been possible for those aged over 55 to take money from their pension savings without having to put the money into drawdown or purchase an annuity. Since then, rising property prices and increased demand for rental properties have led some people to use their existing pension pot to invest in buy-to-let housing. 

It is possible to cash in your pension to purchase residential property - but there are some drawbacks. While you may withdraw up to 25 per cent of your pension tax-free, anything above this threshold is taxed according to your current tax bracket. This could result in you paying as much as 45 per cent on the money you withdraw from your pension. 

One further consideration is that money held within a pension is exempt from inheritance tax if you pass it to your heirs, while to same is not true of buy-to-let property.

However it's still perfectly possible that money withdrawn from a pension could benefit from higher returns in property, thus justifying the decision to withdraw it.

When it comes to property vs pension, there’s no right or wrong answer - it’s best to weigh up your own individual risks and needs, and act accordingly.

Can property be a pension?

If you’re intent on funding your retirement from rental income alone, you should be aware that unless you own an exceptionally large portfolio, rent might not be enough to provide you with the income you need - especially if you still have outstanding mortgage payments. 

Ultimately, whether you can use your property as a pension will depend on your individual circumstances. If you are mortgage-free and have sufficient rental income, you may be happy to live on the proceeds on a month-by-month basis. 

However, it’s worth keeping in mind that being a landlord isn’t an easy job - and it’s certainly not a prospect many people relish during their retirement years. While it’s possible to hire an agency to take care of the ‘hands-on’ aspects of being a landlord, this could significantly eat into your rental income.

Will buying an investment property affect my pension?

Unless you withdraw money from your pension pot to purchase an investment property, your existing pension will not be affected if you invest in buy-to-let property. To fund their retirements, many people choose to invest in both tangible assets, such as property, as well as pensions. This allows them to spread not only their investments but the risk.

Find out more about funding your retirement with buy-to-let investments

Whether you’re a first-time investor or an experienced buy-to-let landlord with an extensive portfolio, PropertyData helps you make more informed decisions. With a variety of tools, features, and real-time data, you can discover which areas of the UK offer the best rental yields, find out which areas are in-demand among renters, and learn which cities have the most rapidly rising house prices. 

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