The value of your investments and the income from them may go down as well as up, and you could get back less than you invested.

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Pension vs property: Which investment is best for your retirement?

4 min read
Michael Martin, Private Client Manager21 Apr 2021

The latest figures from the Office of National Statistics (ONS) state that UK average house prices increased by 8.5% over the year to February 2021, up from 8.0% in January 2021. Average house prices increased over the year in England to £268,000 (8.7%), in Wales to £180,000 (8.4%), in Scotland to £162,000 (8.0%) and in Northern Ireland to £148,000 (5.3%).1

The halcyon days of when house prices were rocketing, and yields were growing, are over. With house prices stagnating and onerous tax changes, investing in property is no longer the golden nest egg it once was.

Whilst property investments can have some benefits from a retirement perspective, relying on a property or a portfolio of property doesn’t really make much sense anymore. Yes, it may offer a yield but when it comes to selling a property, unlike your investments in your pension, you can’t sell it in stages and it could mean a hefty capital gains tax bill upon sale. In addition, the headache associated with finding new tenants, repair and maintenance costs as well as void periods cannot be underestimated.

Furthermore, property counts towards your estate and is subject to inheritance tax (IHT), so if you’re unable to sell the property before you pass away, those who inherit it could end up with an eye watering 40% IHT bill. Not ideal.

The problem with a property is that it’s an all-or-nothing, lumpy asset to dispose of if you want some cash. You can also be forced to sell it all at precisely the wrong time. During the financial crisis, people who’d lost their jobs and needed to support themselves were forced to sell their houses for a fraction of what they’d have been worth just months earlier.

Multiple assets, rather than multiple houses

Investing elsewhere doesn’t have to be a roller-coaster ride of risk. It’s possible to invest the proceeds in a ready-made investment portfolio made up of a variety of assets, including global equities, bonds, alternatives and even property too. So spreading the risk, and not putting all your eggs in one basket. Another egg analogy.

One of the advantages of investing in these multi-asset funds is that you benefit from in-built diversification, which can help smooth returns over the long term. If one asset class is down another might be shooting the lights out – they can balance themselves out. They also have the added benefit of having an investment professional look after the day-to-day management of the portfolio, including what assets to allocate where and when. And you can sell it down in smaller chunks if you want to access the cash or give assets away for inheritance tax purposes.

Get smart with your pension

As the title of this article would suggest, it’s not just having a diversified portfolio which is important when investing. It’s also what comes after – managing your pension. After all, isn’t your retirement the reason you’ve been saving your whole life anyway?

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% (or between 19% and 46% for those in Scotland)2 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 (or 54p).

Another major attraction is that under auto-enrolment, 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 investing in your workplace pension.

In addition, and something that is often overlooked when it comes to pensions, is the breadth of investment choice that is 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 tailored to generate growth or income depending on your retirement goals.

For the vast majority, investing in a pension is a far better option for retirement than investing in property. As well as the generous tax breaks and potential for significant investment growth, pensions offer far more flexibility than property, which makes retirement planning that little bit more straightforward. As ever though, if you’re unsure about what’s best for you, then it pays to take financial advice.

Tax rules are subject to change and taxation will vary depending on individual circumstances. This article does not constitute advice or a recommendation; please consult a financial adviser.

You should be aware that the value of investments may go up and down and you may receive back less than you invested originally.

1 Office of National Statistics (ONS), February 2021, https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/housepriceindex/february2021

2https://www.which.co.uk/money/tax/income-tax/tax-rates-and-allowances/income-taxes-in-scotland-agsh48x50b3u

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