Property or pension – which is better to help fund your retirement?

Should you invest in a rental property or your pension? Each can deliver growth and provide an income when you retire, but the route that’s right for you will depend on a range of factors. We run through how they measure up.

Buying a property to rent out can look like an attractive investment if you’ve got the means to do so. You’d receive rental income that could boost your regular income and savings. Then there are the proceeds you’d hope to receive when it comes to selling the property.

Compared with just paying into a pension, it can seem like property could be the more lucrative of the two (especially if you’ve not paid into your pension for very long). However, there are important things to consider about property as an investment.

What to know when you buy to let

• When you buy a property to rent it out, you pay a higher rate of stamp duty than buying a property to live in yourself
• Being a landlord comes with expenses like service charges (if it’s a flat for example), letting agent fees, landlord's and/or buildings insurance, maintenance and refurbishment costs and the risk of no rental income when the property is empty
• There are increasing obligations on landlords, such as gas and electrical safety certificates
• The current Renters Reform Bill could affect how landlords can get possession of their property. While still in draft form, the Bill will improve tenants' rights in many ways which may create more friction if you decide to sell
• From 6 April 2020 income tax relief (Opens in new window) on all residential property finance costs is restricted to the basic rate of Income Tax for individuals. Landlords who are higher rate taxpayers are likely to have a higher income tax bill if they pay mortgage interest on the property
• If you take out a mortgage to buy a rental property, you're subject to changes in interest rates if you have a variable rate mortgage or when your fixed rate mortgage term ends. If property prices fall, or your after-tax rent is less than your mortgage and other costs, you could make a loss
• The amount you make when it comes to selling your property – and the speed at which it sells – will depend on the state of the housing market at the time, as well as the property’s location. The property may not sell at all, or you could end up in negative equity (when the value of the property is less than the remaining mortgage)
• The sale of the property will be subject to capital gains tax. The threshold at which you can retain your profit has lowered in recent years, which means more of any property gains you make may now be subject to tax. You’ll also need to declare the capital gains within 30 days of making the sale
• If you don’t sell your rental property 7 years before you die, it could be subject to inheritance tax

Managing an investment property yourself takes more time out of your day than simply paying into a pension. It’s important to weigh up whether you have the time to commit to being a landlord or are willing to pay a letting agent to manage it for you.

You also need to ensure the yield works in your favour; there are calculators online to determine if the rental income is enough to justify the overheads when the capital could be invested elsewhere.

How a pension compares

Investing in your pension, whether it’s through contributions to a workplace scheme or paying into a personal pension, could result in your money working harder for you. The government provides income tax relief on contributions at the highest rate of income tax you pay, and any investment growth and income within the pension are sheltered from income and capital gains tax. You can also choose to take a tax-free lump sum of 25% of the value of your pension (up to £268,275 - 25% of the Lifetime allowance of £1,073,100) from age 55 (until 2028, when the age at which you can take your pension rises to 57). Other benefits of pensions include:

• The value of your pension pot falls outside your estate when it comes to inheritance tax
• You can have more control over where your money is invested compared with tying it into a property
• Potentially lower management costs than property – especially if you consolidate several pensions into fewer pots
• Compound investment growth, which can make a big difference to the value of your pension over time
• Measures since 2015 mean that you have a greater choice in how you access your pension, and when

The main disadvantage is that you can’t start to access your pension pot until you are 55. But with more people working beyond retirement age – or not ready to start drawing from their pension at that stage – this may not be a major issue for you.

Property vs pensions – where should you put your money?

Many experts would say it’s wise not to put all your eggs in one basket. This means you shouldn’t neglect paying into your pension because you’ve put some money into property. On the flip side, if you have the means to invest in property, don’t discount it if you think it could be a good investment.

When it comes to delivering an income for your retirement years, paying into your pension from an early age is important. With property, often holding on for the long term is better. Selling quickly can mean you only experience the downward trend of a volatile property market, and you're also likely to have to pay an early repayment charge if you have a new mortgage. It’s wise to get some advice from an expert if you’re thinking about investing in property so that you make the best decision for your financial future.

Introducing Nutmeg

Introducing Nutmeg, the digital wealth manager that's part of the Chase family. You can now open a pension account with Nutmeg (Opens in new window) and keep an eye on your investments from the Chase app (Opens in new window)– so you can see everything in one place.

Nutmeg is authorised and regulated by the Financial Conduct Authority in relation to certain investment services and restricted advice only. Chase is a trading name of J.P. Morgan Europe Limited. Nutmeg and J.P. Morgan Europe Limited are J.P. Morgan companies. Products provided by Nutmeg are not guaranteed by Chase. Before applying, you should consider if a Nutmeg account and its features are suitable for you and your investment needs.

Recommended reading

• Should you become a buy-to-let landlord?
• Ways to save for your pension when your budget is tight
• What is pension consolidation?

Disclaimer: As with all investing, your capital is at risk. The value of your portfolio can go down as well as up, and you may get back less than you invest. A pension may not be right for everyone, and tax rules depend on individual status and may change. If you are unsure if a pension is right for you, please seek financial advice. Articles may reference products and services that Chase UK does not currently offer.