Pension or property – which is best to fund your retirement?

It’s often said Brits have a long-term love affair with the housing, and the residential property market has indeed performed well in investment terms over the longer term.

Using the government’s online UK House Price Index, we can see that the average price of a UK property (houses and flats) was £128,579 in June 2003, but had grown to £287,546 some 20 years later in June 2023 – prices have more than doubled in that time.  

However, on a more short-term timeframe, in 2023 we are living through a period of falling property values and rising interest rates.

Research commissioned by Nutmeg found a third of non-retired adults surveyed (2,000 people) believe they’ll still be paying rent or a mortgage after they retire*.

But, if you can afford it and are considering investing in additional property to fund your retirement years, or want to downsize in later life to provide a lump sum to live off, there’s a lot to think about. Due to the generous tax allowances, a pension is often still the most efficient way to invest for later life.

Buying a property to provide an income

You might consider a buy-to-let as an alternative to paying into a pension, as you’d be receiving a rental income as well as potential capital gains when you come to sell it.

Property as pension can work well in an environment when interest rates are low and house prices are rising. However, many parts of the country –especially rental hotspots in the South – are this year experiencing a decline in house prices, resulting in less than favourable conditions for landlords if they’re selling a property.

On the flip side, rental costs are rising – up by an average 5.3% in the 12 months to July, according to the Office for National Statistics. Your income stream as a landlord may be rising. But, from renters’ perspective, this could impact retirement provision, especially if you still expect to be paying rent when older.

Challenges facing buy-to-let investors

If you’re intending to use property to help fund your retirement, here are some points to note:

• The sale of your property could be subject to capital gains tax on what you make, which will eat into your profit. You’ll need to declare any capital gains within 30 days of the sale.
• When you buy a property to rent, you may pay a higher rate of Stamp Duty than when buying a property to live in yourself.
• If you don’t sell a buy-to-let before you die, it could be subject to inheritance tax.
• Since April 2020, landlords have not been able to deduct their mortgage interest payments when filing their tax returns, resulting in potentially higher tax bills.
• Rentals come with outgoings like service charges, letting agent fees, landlords and buildings insurance, maintenance costs and the risk of no rent when the property is empty.
• Managing a property and your tenants takes time and commitment.
• Mortgage deals for buy-to-lets are not as attractive when interest rates are high.

The benefits of investing into a pension

Investing in your pension, whether through contributions into a workplace scheme or paying into a personal pension, can mean your money working harder for you if the investment pot grows over time.

Importantly, the government provides tax relief on contributions, tax-free growth and tax-free lump sums (up to a certain amount) if and when you reach an age when you can withdraw.

Other benefits of a pension include:

• Potentially falling outside of your estate when it comes to inheritance tax.
• Giving you more control over where your money is invested.
• Having lower running costs than property – these may potentially be reduced further if you consolidate several pensions into one pot.
• Potentially benefiting from the power of compound growth over time.
• More freedom in how and when you access the money.

The main disadvantage of a pension is that you can’t start to access your funds until you are 55, rising to 57 in 2028. But with more people working beyond traditional retirement age – or not ready to start drawing from their pension at that stage – this may not be a major issue for you.

What about downsizing?

Downsizing is when you sell your home to buy a smaller one, which could mean lower bills and a large cash sum to fund your retirement. Do some research into the type of home you’ll be able to afford if you’re downsizing and consider interim costs. For example, if your search takes some time, you may decide to rent in the area you’re thinking of moving to.

Downsizing can be emotional, especially if your home holds fond family memories. Talk it through with your loved ones, so that you’re all clear about the reasons for the move. There are also costs that come with selling your home to consider – like survey fees, legal expenses, estate agent fees and moving costs.

Think about your future and plan what your retirement income and outgoings could be – in your current home compared with a smaller one. If you decide to downsize:

• Clear out any clutter before you move and consider selling items you’ll no longer need.
• Are any repairs needed before you sell?
• How much space will you need in your new home for hobbies, work and guests?
• Think about the fees and costs of selling your home and moving to a new one, and consider inheritance tax implications with help from an adviser.

Along with reducing your bills, helping you to pay off debt and putting some money towards your retirement, downsizing has other benefits. Moving to a less expensive-to-run, smaller home could make your life simpler – leaving you with more time to do the things you enjoy in your later years.

Your long-term plan

Properties and pensions are just two options to consider for funding your retirement but it’s important to weigh up the differences. Depending on when you want to stop working, your savings and investments are likely to have to last for many years. You’ll also need to consider the impact of inflation on the cost of living.

Financial planning is vital when it comes to your retirement and your investments – now and in the future. It’s never too late to open a pension and start contributing to a pot that can benefit from tax relief and compound interest.

If you need guidance in creating a retirement plan that will help you reach your retirement goals, book a free call to speak to our team and explore your options.

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. A pension may not be right for everyone and tax rules may change in the future. Please note that during any transfer, your investments will be out of the market. If you are unsure if a pension is right for you, please seek financial advice. Tax treatment depends on your individual circumstances and may be subject to change in the future

*Source: Based on a survey of 2,000 UK adults carried out between 27-30 June 2023. Research carried out by Opinium.