Property v Pension - Where's best to invest?

Published: 03/10/2016 By Lucy Murray

Andy Haldane, chief economist at the Bank of England recently suggested that investing in property was a better bet for retirement planning than putting your money into a pension.  His reasoning for this is that as long as there is a lack of sufficient housing stock, house prices will continue to rise.  He also went on to state that financial planning and pensions were too complicated for the average person to fully understand which made informed decisions very difficult.

One in three persons has ditched their pension to invest in property with 55% selling their house to fund their retirement (source The Observer).

With low annuity rates undermining the chances of getting a decent pension but the steady and sometimes fast increase in house prices as well as an average rental yield of around 7%, it’s no wonder that some people are choosing property over pension.

Over the decade to the year end of 2012 property gave an annualised return of 11.2%, however that is across the UK, London is significantly higher. For the same period equities returned 5.1% and 7.6% from bonds.

Things to consider when factoring property over pension is stamp duty and other purchasing costs, tax on rental income and capital gains tax when exiting if you’re not selling your main home.  Tax relief is where pensions triumph, especially if you’re a higher rate taxpayer with 25% of pension withdrawal tax free.

With that information what can we conclude?  Property can provide a high return, often quickly especially in London and the Home Counties, but it is subject to higher tax & additional costs.  The asset can also be disposed of whenever you want.  Pensions however take far less tax but growth is generally less and the pension cannot be released until you are 55.

Each has its own pros and cons and with all investments it is prudent to speak with a professional financial advisor who will clearly explain each option and should be able to provide a financial forecast based on your investment.