Pension vs Property: Which Is The Best Investment?

When it comes to any kind of investment, naturally your first concern as an investor is whether the return on that investment will be healthy or not. Also, whether the investment will suit your current status, and whether it will support your long term goals. 

Two of the largest forms of capital investment the average person will make in their lifetime involve pensions and property. While many investors choose to invest in both pension schemes alongside property, in some cases it can make more sense to favour one versus the other, whether entirely or in terms of the balance of capital that is invested. 

Here at Thirlmere Deacon, we assist our clients with all aspects of property investment both here in the UK and abroad. While we’d always recommend obtaining independent financial advice, we are keen to share industry insights with our existing investors as well as those who are looking to invest with us for the first time. 

So, if you’re in search of some clarity when it comes to the pension vs property debate, here’s everything you need to know about both options so that you can move ahead with your investment decision with confidence. 

Pensions Vs Property: A Brief Overview

Both pensions and property are designed to grow in value over time so that either way you will stand to gain a payout. However, both operate differently, and this may mean one form of asset could be better suited to your investment strategy versus the other. 

Pension pots are paid into gradually over your working life, with experts recommending to contribute between 10% and 12.5% of your salary into your pension pot each month, assuming you will contribute for the full 35 years. You can also make lump sums into pension funds, with the tax-free allowance for pension contributions currently standing at £40,000 per year. 

Property, on the other hand, usually requires an upfront deposit and then a mortgage to be paid off over a set term. Unless purchasing a property outright, the average mortgage lasts for 25 years. Though with a buy-to-let property, the cost of letting the property is designed to cover the mortgage, with the ability to recover the cost of the property at an increased value in line with inflation when the property is eventually sold. 

There’s also the plausible option of investing both into a pension fund and property simultaneously. This may be a strategy to consider if you want to benefit from both asset types. 

As mentioned above, it’s also possible to invest more capital into one asset type versus the other, without having to choose solely one option. 

What You Need To Know About Retirement

The pension vs property debate isn’t exclusively tied to funding retirement. But it is a top consideration since both asset types can help fund your living costs in later years, especially when a wage is no longer coming in.

In essence, the idea of planning for retirement either through paying into a pension or investing in property is so that your standard of living does not decrease once you are no longer being paid a salary. As well as paying for basic living costs and even luxury amenities such as holidays and transport, a retirement fund may also be needed to fund your care as you head into your elderly years. 

One such expense you may face in old age is care home fees, which currently cost between £2,816 and £3,552 per month. Such expenses are something that can come as a shock to those who haven’t financially planned for their retirement, which is why it pays to think ahead. 

The good news is that those who have invested in property will typically stand a much better chance of recovering the fees for end of life care if their existing savings cannot cover it, due to the value held in property. 

In addition, some investors also want the option to leave funds to their family, which will also require prior hindsight to budget for, in addition to all of the other expenses retirement will bring. 

How Much Do You Need For Retirement UK?

Financial experts recommend that the average person requires 20-25 times their salary saved to fund their retirement years. 

As an example, this would mean someone with a current UK average salary of £26,000 per year would require between £520,000 and £650,000 to maintain a similar standard of living when they retire.  

The true amount will depend on your projected living costs when you retire, and the standard of living you wish to have. Naturally, the higher standard of living, the more money will be required to fund this. 

As an example, according to Which, the average expenditure for higher earners wanting to lead a luxurious lifestyle in retirement would require a £31,000 pension pay out per year. This would require a pension pot of up to around £775,000 to fund. 

Some of the top aspects that make up this figure include long haul holidays (£5,682), short haul holidays (£3,588), car payments (£4,438), groceries (£2,256), housing payments (£2,592) and insurance (£1,824).

What You Need To Know About The UK Property Market

What any investor wants to know is whether there is a demand for their asset class or not, along with the projected value increase over time. 

When it comes to property, there is a chronic housing shortage in the UK. According to the government, 340,000 new homes need to be built each year in England alone to meet this demand. In the period between 2020 and 2021, only 210,000 new houses were built in England, which is a sharp decline from the 243,000 new homes that were supplied in the previous year. 

The housing shortage is not an easy fix and coupled with rents rising across the UK averaging £1,752 in Greater London, owning property remains highly desirable both as an owner, as well as a buy-to-let landlord. 

In addition, UK house prices rose by an average of 10% during 2021 against the backdrop of a pandemic, with the average home in the UK now worth £268,349.

This proves that the property market remains resilient, which is a top factor any investor should consider before discounting property solely in favour of a pension. 

Read more: Why Is The UK An Attractive Place To Invest?

How Much Do You Need To Invest In Property?

Investing in property begins with the cost of a deposit, which can range between 10% and 20% of the total purchase price, depending on your status and whether you have previously owned any property before.

Although the average UK house deposit stands at £57,300, the exact figure of the deposit will also depend on what area of the country you are looking to invest in, the property type, its condition etc. 

As an example, our Hull Central Apartments have an asking price of £125,000 which is well below the UK average house price, yet boast a predicted 28% price growth by 2025. So in many ways, property investment offers a lot of opportunity for those on the starting end of the scale, just as it does in the premium market. 

Read more: Best Way To Invest £50k In Property

Pension

The purpose of a pension is to provide financial stability during retirement when you are no longer of working age. Some people also work towards retiring early, meaning they’ll need to access their pension pot much sooner (FIRE). 

A pension requires you to put money away each month, and this money cannot be accessed until the age of 55, though in some cases, you can receive access to 25% of your pension before this age limit.

In addition, most people are also entitled to a basic State Pension, which at the time of writing can be claimed at age 66.

The current state pension equates to £179.60 per week, or £9,339 a year. However, a UK Retirement Living Standards survey found that the average single person requires £20,800 a year to live on, rising to £36,000 a year for couples. 

Of course, the age limit when you can start claiming your State Pension often increases, and in addition, the amount of state pension you receive will depend on the year in which you were born and how many qualifying years you have on your National Insurance. 

While each person will have different financial requirements for when they retire, it is clear that additional savings or indeed investments will need to be made to cover the deficit, which is why most people also pay into an official pension scheme, such as a workplace pension or a private pension. 

Pension Pros

  • There are plenty of tax benefits to be had with investing in a pension.
  • Workplace pensions also require employers to also contribute to their employees’ pension funds.
  • Lots of pension options are available including ones that offer investment portfolios to diversify your risk.
  • Pensions work silently in the background, without you having to think about them so long as they are being continually paid into.
  • Pension calculators can help to estimate the value of your pension, and let you know if you have a deficit that needs making up. 
  • The government does give you the opportunity to make up lost years on your National Insurance record, so that you will receive the full State Pension amount. 

Pension Cons

  • Constantly changing rules make it difficult to predict what your pension could truly be worth when you come to cash it in. 
  • With the cost of living ever rising, many people can not afford to contribute to their pension to the level needed to provide an adequate standard of living in retirement.
  • Pensions require a continued contribution from an early age to provide a generous payout, meaning they are not generally ideal for those who are close to retirement age with no previous pension or minimum contributions.
  • Pensions can be confusing to understand, and it may be difficult to tell if you have the best deal or not.
  • The full capital can not be accessed until a minimum age of 55, unlike property which can be sold at any time. 

Property

The simple fact is that we all need a place to live, which is why the demand for housing is unlikely to diminish completely, even if the supply chain does eventually catch up. 

Anyone who invests in property will be able to inspect their asset as property is a physical asset. The property market in itself also remains strong with continual growth increases reported year on year.  

As an investor, it’s also easy to understand what makes a property valuable such as its size, the location it’s in, the condition of the property and whether any improvement works can be made. Therefore, it’s possible to purchase a property and renovate it for a profit or hang on to it as a buy-to-let property with a view of selling the property later down the line. 

However, any property investor still needs to research the costs and ultimately the commitment the property will require for as long as it is in their possession. For example, as well as taxes or fees associated with property ownership, any property that will be let out must be kept to a good living standard. Although property owners can enlist the services of a property management company, some landlord involvement will be required if looking to let out your investment. 

Property Pros

  • You don’t have to wait until retirement to reap the fruits of your labour with property, as it’s something that can be invested into at any time, including building alongside a pension.
  • There are a lot more options available to investors with property than with pensions, i.e the type of property, its location, whether to let or sell the property etc.
  • There is no age limit when a property can be sold and the money from the sale accessed, as there is with when a pension can be accessed to its entirety. 
  • Far more resources exist within the property market than with pensions, making it easier to make an informed decision and gain new insights.
  • Property prices have remained resilient, even throughout the backdrops of economic uncertainty. 
  • Property is something that you physically own, and can make changes or upgrades to which will increase its value – the returns of which can often be gained much faster than increasing your pension contribution. 

Property Cons

  • You have to be careful about which type of property you opt for – investment properties here at Thirlmere Deacon are completed to an excellent build standard, we also look out for a good developer history, offer central locations etc – when buying property in general, this may not always be the case which is why due diligence is needed. 
  • If purchasing a ‘doer-upper’ property, then additional capital will be needed to realise the potential profit of your investment.
  • Location is essential with property – although some areas are up and coming, ultimately the location of the property including nearby amenities will determine its long term value.
  • Taxes and fees will likely apply for any property sales, so these will need to be factored into your investment strategy. 

Pension vs Property FAQs

We’ve answered some of the most common questions investors have when it comes to choosing between investing in a pension versus property below. 

Have any questions you don’t see here? Thirlmere Deacon holds regular investment Q&A sessions over on our YouTube channel. Be sure to subscribe and leave us a comment, and we may just feature your question in our next session. 

Can I Use My Pension To Buy A House?

While it is possible to use your pension funds to purchase a property, there may be tax penalties for doing so, meaning it’s not generally recommended for residential property. 

However, we do suggest reading the information under ‘Can I Purchase Through A SIPP?’ under our hotel room investments page. That’s because some SIPP may be approved for commercial property investments.  

As always, we’d recommend you speak to a pensions expert to clarify your individual situation. 

Can I Use My SIPP To Buy Property? 

Yes, but as alluded to above a SIPP can generally only be used to purchase commercial property, which is why we offer options for SIPP with our commercial hotel room investments. 

Generally speaking and if approved by your provider, a SIPP can be used to purchase freehold, leasehold or commonhold commercial property in the UK.

How Much Is State Pension In 2022? 

The State Pension is due to increase by 3.1% in 2022. This will mean the basic State Pension will increase to £141.85 per week, whereas the full State Pension will increase to £185.15 per week. 

When Can You Access Your Pension? 

In general, workplace or personal pensions can be accessed when you reach the age of 55. To access your State Pension, you must reach the State Pension age which currently stands at 66. 

In Summary: Is Property Better Than A Pension?

While we are keen to stress that investing in a pension versus property doesn’t have to be a clear choice over the other, it’s useful to recap what both have to offer, and ultimately what they require from you as an investor. 

A pension is something that requires a continual contribution or a lump cash sum to create enough money to sustain your standard of living once you retire. Pensions come in many different forms, though offer the highest return when they are started from a younger age due to inflation. There is also an age limit of when you can access your pension funds, and when you are then entitled to a further State Pension. Though, the State Pension alone often falls way short of the cost of living, which is why an additional source of income such as a workplace pension (or any other type of investment) is needed to cover the shortfall. 

Your pension may also be taxed if you exceed what’s known as the lifetime allowance, which currently stands at £1,073,100.

Property generally requires a lump sum totalling a minimum 10%-20% of the total purchase price to secure. Property prices in the UK continue to rise, meaning it can be difficult for newer investors to enter the market, though the costs can be offset by investing in buy-to-let property whereby a healthy yield is expected. 

Unlike a pension, property can be sold at any time, including when the market is more favourable to sellers. 

Taxes and fees also apply when a property is sold, and any buy-to-let-investors should also calculate the implications for their tax band, to ensure their rental yield and overall return on investment remains healthy. 

Property Investment UK – Opportunities Starting At Just £75,000

Are you interested in investing in property? Thirlmere Deacon is a property investment company with offices in London and Dubai. 

We have investment opportunities available spanning the length and breadth of the UK, including Birmingham, Hull, Liverpool, London, Luton, Manchester, Newcastle, Preston and Sheffield.  

With our investment opportunities starting at just £75,000, and rental yields well above the national UK average, we have something to offer all interested investors. 

If you’d like any further advice on anything we’ve mentioned above, or if you are considering investing in one of our opportunities, please drop us a message or call us on +44 (0) 2039507939. 

 

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