The great property vs pension debate

We often hear people say “My home is my pension” and in many ways this is understandable: the idea of owning property as a form of retirement investment has become ingrained in our collective consciousness.

But while investing in property can be a good way to build wealth, it shouldn’t necessarily be considered a foolproof retirement strategy.

In this article, we’ll explore why.

1. Lack of diversification

One of the key principles of sound financial planning is diversification. Relying solely on property as your pension puts all your eggs in one basket.

The housing market is notoriously susceptible to fluctuations – just last week there were reports saying UK house prices had recently fallen for the first time in a decade.

Economic conditions, housing demand, and location-specific issues can all affect property values, and these are all factors outside our control.

However, by diversifying your portfolio through a well-managed pension, you reduce your overall risk and increase your chances of getting a good return. Plus you have the added benefit of being able to invest in things that you're passionate about or interested in.

2. Illiquid asset

Property is a highly illiquid asset, meaning it can be challenging to convert into cash quickly.

If you find yourself in need of funds for emergencies or unexpected expenses during retirement, relying on the sale of your property can be a lengthy and uncertain process.

Unlike traditional pension plans or other investment vehicles, which offer greater flexibility and access to funds when needed, property ownership can tie up your wealth in a single asset, limiting your options.

3. Ongoing expenses and maintenance

While property ownership can provide rental income or potential appreciation over time, it’s essential to consider the ongoing costs associated with maintaining and managing a property.

Repairs, renovations, council tax, insurance, and other expenses can eat into the potential returns and increase the financial burden during retirement. These costs may outweigh the benefits, especially if you don’t have the time, resources, or inclination to actively manage the property.

4. Tax

One of the biggest advantages of saving into a pension is that you can reduce the tax you pay, which provides an instant boost to your savings and helps the fund to grow faster than other kinds of investment.

You can’t benefit from the same tax relief with a property.

In addition, unlike houses, pension pots aren’t subject to inheritance tax when you die, which means if you pass away before age 75, your pension passes to your loved ones tax free.  If you’re older than 75 when you die, your pension still isn’t usually subject to inheritance tax, but your beneficiaries would pay income tax at their marginal rate.

One final reason people have for having a property rather than a pension is that they think downsizing will provide a retirement income. But by the time you’ve paid all the legal fees, stamp duty and moving costs, you might find that downsizing wasn’t the lucrative financial venture you’d first hoped.

In short, relying solely on property as your pension plan can expose you to significant risks, including lack of diversification, illiquidity, ongoing expenses and market volatility. You might also lose out on significant tax advantages. 

Instead it’s advisable to adopt a diversified approach to retirement planning, combining various asset classes including traditional pensions, investments, and other savings vehicles. By doing this you can mitigate risks and build a more robust and adaptable retirement plan that can withstand the uncertainties of the future.