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24 May 2018

Property vs pension: which is the better investment?

Will buy-to-let property or a big pension pot give you a comfier retirement?

With the UK population living longer than ever, the ways in which you invest for retirement can have life-changing consequences.

Property has long been seen as a sound investment. But with house prices stagnating and an increasingly punitive buy-to-let landscape, can it still beat a pension for long-term growth?

Here, we explore the pros and cons of both pension and property investment to help you decide what's best for you.

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Investing in buy-to-let property

Property values have skyrocketed in recent decades, prompting many investors to build expansive property portfolios now worth hundreds of thousands, or even millions, of pounds.

But is investing in property still a good bet? Headlines have recently warned that the bubble has burst in some regions - for example, the latest LSL Acadata house price index, released on Monday, showed a 2.5% year-on-year drop for London house prices.

Other areas, however, are continuing to see growth, with Wales experiencing annual house price growth of 4.8% in the year to May.

It's not uncommon for the market to experience blips as supply, demand and the mortgage-lending landscape adjust themselves. For this reason, it's important to see property as a long-term investment.

Is buy-to-let losing its appeal?

There have been a raft of changes for buy-to-let landlords in recent months, arguably making property investment less attractive than it once was.

Mortgage interest tax relief has dropped to 50% and will be cut to zero in 2020, with landlords instead given a 20% tax credit on their mortgage interest; mortgage-lending criteria are tightening; some councils have introduced mandatory landlord licensing; and buy-to-let properties now need a minimum EPC rating of E.

Investors have also had to pay an extra 3% in buy-to-let stamp duty since 2016, and higher and additional-rate taxpayers are charged 28% in capital gains tax on property, compared with 20% on other assets.

Landlord responsibilitiescan also be time consuming. Even if you use a managing agent, you'll need to factor in the danger of problem tenants, periods when the property is empty, running costs, insurance and property maintenance.

Despite these challenges, property investment can be profitable in the right circumstances. In fact,recent researchpredicted that someone investing in a buy-to-let property now stands to make an average £265,000 in capital gains and rental income over a 25-year period.

Nutshell summary: pros and cons of property investment


  • Property values have shown phenomenal growth in recent decades. The average house price in February 2018 was £225,047, up from£57,726 in April 1990, according to the Land Registry.
  • The combination of rental yields and capital growth means you have both immediate income and the potential for long-term profit.
  • You can sell the property at any point and invest the money in other ways.


  • Buying, maintaining and selling property takes more time than contributing to a pension.
  • If you have a mortgage, you run the risk of being left in negative equity if house prices fall.
  • Tax changes have made property investment less financially rewarding than it once was.
  • Mortgage providers are tightening their lending criteria.
  • Property counts towards your estate and is therefore subject to inheritance tax.

David Blake, principal adviser at Which? Mortgage Advisers, says:'Over the years, property has generally been a sound investment for most people.

'That said, we are now entering a period of economic uncertainty with no definitive timescale. Property should generally be treated of as a longer-term investment and, like any investment, there are no guarantees of a return.'

Should you see your own home as your 'pension'?

Some people choose not to put money into a pension, instead saying that 'their house is their pension'. But treating your own home as your retirement gravy train can be problematic - after all, you'll always need somewhere to live.

The most obvious course of action if you don't have a large pension but have built up significant equity in your home (or paid off your mortgage entirely) is to downsize upon retiring.

However, if you've lived in the same house for a long time it can be an emotional wrench to leave, and many people are surprised by how difficult they find it adjusting to life in a smaller property.

Moving house also carries significant costs - not least stamp duty, which can run into thousands of pounds.

Equity release - where you borrow money against your home while still living in it - is your other option if you have a property but only a small pension.

This is an expensive option, though, and will usually make a significant dent in your descendants' inheritance, so seek independent financial advice before releasing cash in this way.

Investing in a pension

The 2015 pension freedoms mean that pensioners now have much greater flexibility. Money can be accessed from the age of 55 and you can choose how you take it - all in one lump sum, buying an annuity, leaving it invested in the stock market and 'drawing down' income when you want it, or a combination of the three.

You still get tax relief on any contributions you make to your pension pot, meaning that a basic-rate taxpayer only puts in 80p for every £1 that goes into their pension, with the government contributing the difference. Higher-rate payers only have to cover 60p per £1, and for additional-rate payers it's 55p.

Under auto-enrolment, your employer must also contribute 2%, increasing to 3% from April 2019 - and some employers are much more generous than this.

Find out more:what are my pension options?

Will my money grow?

Last year, 95% of pension and drawdown funds saw positive growth, according to Moneyfacts.

The comparison site also says that the average pension fund has grown every year since auto-enrolment was introduced in 2012, with four of those six years seeing double-digit growth. This means that, currently, pensions are enjoying stronger growth than house prices.

However, only 20% of non-retired people believe a pension will deliver maximum returns, compared with 49% for property, according to the ONS.

Pension protection

The recent collapse of firms including construction giant Carilion and department chain BHS - and the resultant hit on their pension funds - has led many people to question whether their pension is as safe as they thought.

Fortunately, pensions are protected. However, if your employer goes bust before you retire and you have a final salary pension, you may lose 10% of your pot.

Find out more:how pensions work

Nutshell summary: pros and cons of pensions


  • It's extremely tax-efficient: pension tax relief means the government will top up your contributions based on your tax band.
  • If you save into a company pension, your employer will also contribute.
  • The 2015 pension freedoms mean that, these days, you have a greater degree of choice in how you access your pension.
  • You get 25% of your pension income tax-free, and this doesn't count towards your main tax-free allowance.
  • You're unlikely to end up with less than you've put into a pension, although this is a risk with any type of investment.
  • Pensions don't count towards your estate for inheritance tax purposes.


  • You can't access your pension until you're 55.
  • If you have a workplace pension you won't have much choice in how your money is invested, although you could look into a personal pensionif you do want to have a say.
  • The government could change the rules on how you access your pension at any time.
  • With power comes responsibility. If you choose to take your entire pension in one go, you'll need to plan carefully to make sure it lasts.
  • There is a small possibility your pension fund could lose money, or the company could go bust.

Find out more: Which? guides on pensions and retirement

So what should you do?

The question of how best to invest your money in order to secure a comfortable retirement is complex, and certainly one on which you should seek independent advice. Neither property nor pensions offer a guaranteed level of income, and both options carry risks as well as potential rewards.

No matter how much you're able to set aside, the uncertain economic outlook and current wobbly markets mean that the old adage 'don't put all your eggs in one basket' has never been more appropriate.

Owning property as part of a more diverse investment portfolio is likely to be a savvy move - and if you have control over the ways in which your pension is invested, you could also choose to invest in property this way. If that's not an option, you could explore property crowdfunding orpeer-to-peer lending.

But, as pensions are also performing well for growth at the moment and are so tax-efficient, it would be wise to spread your money and ensure you're investing in this way, too.