Pension or Property? What is the best investment strategy?

We often get asked by our clients, ‘what would be better to invest in: property or pension?’ To put it simply, the answer is both.

Interest offered by cash savings and bonds is quite low compared to the return on investment (ROI) you could potentially receive from property and investments, and both offer a more robust buffer against inflation than cash savings.

Investing in property may seem more ‘risk free’ than investing in stocks and shares, although this is not always the case if you take an informed and intelligent approach to building an investment portfolio.

Focusing your financial investments on a combination of the two (property and pension) allows you to get the best out of both types of investing.

Here’s how you do it.

Property: Pros & Cons

Pros: strong financial foundations

The upside to owning a buy-to-let property is twofold: you will receive a regular rental income and your asset is likely to increase in value, for example: a property bought in the South West in February 1990 for £60,000 was worth around £276,000 in February 2022¹.

Cons: the downside

• Finding a buyer prepared to offer the right price can take a while, which means you won’t be able to instantly access your money.
• Finding a tenant can take a while and you could encounter loss of rent if they prove to be unreliable.
• When your tenant vacates, you might face periods of time when you don’t receive rental income. You are also liable for the maintenance and repair of the property.
• Property is subject to Capital Gains Tax at a special rate when you sell.
• Property is subject to inheritance tax (IHT) when you die.
• There are associated costs such as legal fees, stamp duty and estate agent fees.
• If you need to access a smaller amount of capital, you can’t part sell a house.

You must pay tax on any profits you make from renting a property, after expenses have been deducted. The tax rules around renting property are complex so we recommend you consult an accountant or tax expert to help you, as tax rules change depending on whether you own and rent residential properties, furnished holiday lettings, or commercial properties.

Cons: we don’t have a financial ‘crystal ball’

• There are limits to the amount you can contribute to your pension. This is subject to both Annual (currently set at £40,000, although this amount can taper down if you have higher earnings) and Lifetime Allowance (currently set at £1,073,100)³.
• You can only access your pension when you reach the age of 55.
• If you have an investment portfolio it can be difficult to establish how much you will have at your disposal when you reach retirement age.

The two burning questions: “How long will my pension last?” and “What if my circumstances change?” can be difficult to answer by yourself with the degree of accuracy you might want.

Again, our independent financial advisers can assist with working out how much money you will need, accounting for various life scenarios.

Effective strategy

A great way of passing on your wealth outside of your estate is to sell any property you have and add it to your pension pot. This strategy means you will have more funds in your pension and be able to pass it on to your loved ones outside of IHT when you die.

1. House price calculator: https://www.nationwide.co.uk/house-price-index/
2. Data: Netwealth: Futureproofing your retirement with property and pension pdf.
3. https://www.moneyhelper.org.uk/en/pensions-and-retirement/

Lloyd & Whyte (Financial Services) Ltd are authorised and regulated by the Financial Conduct Authority. It is important to take professional advice before making any decision relating to your personal finances. Information within this article is based on our current understanding of taxation and can be subject to change in future. It does not provide individual tailored investment advice and is for guidance only.  We cannot assume legal liability for any errors or omissions it might contain.