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Pension vs property: what should you do with your cash?

4 min read
Daniel Wood, Senior Financial Planning Director23 Jun 2022

For decades, many people have favoured property when it comes to funding their retirement. And it’s easy to see why, particularly in today’s climate, with house prices rapidly rising year-on-year.

The Office for National Statistics (ONS) yesterday, 22 June, released its latest House Price Index and given the current fascination with rising property prices, we thought now would be the ideal time to assess whether investing in property is a better retirement solution than investing in a pension. Yesterday's data revealed that UK house prices have increased by 12.4% over the year to April 2022, but does that mean bricks and mortar is the best retirement solution? At 7IM, we don’t think so.

We believe that investing in a pension is a more robust route to a comfortable retirement, especially when you prepare for your later life by partnering with a firm that offers flexible retirement solutions, such as ourselves.

It’s no secret that property prices have rocketed in recent years, with the average cost of a house in the UK rising to £281,000 in April 2022, £31,000 more than in April 2021, according to the ONS. However, despite rising prices, the number of monthly property transactions has dipped, data from Her Majesty’s Revenue & Customs revealed. In April, around 106,780 residential properties were purchased, down by 3.9% from March’s figure of 111,150. One possible explanation is that many individuals are realising the benefits of investing outside of the property bubble.

The challenges for property investors don’t end there, with figures from the Bank of England showing that the number of mortgages approved to finance house purchases fell by 5.1% in April, tumbling to 65,974. This figure represents a 23% year-on-year decline when compared to April 2021 and comes during a period of rising interest rates and soaring inflation.

With a cocktail of concerns facing residential property investors, it would suggest that property is not ‘as safe as houses’, so investing in a pension is likely to be a far more prudent approach when it comes to funding your retirement.

One of the main attractions of a pension is the tax relief that you get on your pension contributions. The government will give your pension contributions a ‘top up’ or ‘bonus’ in the form of tax relief of between 20% and 45% depending on your level of income tax. This means for every £1 that is invested in your pension, the actual cost to you could be as little as 55p. This will depend on your marginal rate of income tax, and you should seek professional advice when contributing to a pension.

The government introduced an initiative in 2012 that would drastically change the way people save for their retirement - auto-enrolment. Since it was introduced, around 10 million people have been auto enrolled and are saving for later life with their employer’s help. Under the scheme, so long as you qualify, your employer will contribute a minimum of 3% to your workplace pension – though many companies offer much more generous contributions than this. On top of the government tax relief, these contributions can give your pension savings a significant boost, so it’s well worth remaining enrolled in your workplace pension.

In addition, and something that is often overlooked when it comes to pensions, is the breadth of investment choices that are available. A Self Invested Personal Pension (SIPP), for example, lets you invest in a variety of assets including shares, bonds, investment trusts, funds, currency, commodities and even property, to name but a few. This allows you to create a truly diversified investment portfolio in your pension that can be tilted to generate growth or income depending on your retirement goals.

However, the retirement landscape is evolving and we’re aware that individuals demand much more flexibility when it comes to planning for their future.

Tax rules are subject to change and taxation will vary depending on individual circumstances.

Please note that this article is intended for educational purposes only and should not be taken as investment advice. The value of investments can go down as well as up and you could get back less than you invested. Investment in funds will not be suitable for everybody and you should make yourself aware of the risks before investing and if you are unsure, you should seek professional advice.

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