Pensions or Property

Senior man working on laptop at home

How should you fund your retirement and which is the better approach?

We compare these two popular options for retirement funding.

Property: Two Approaches

When people talk about using property to fund their retirement, they are likely to be referring to one of two options: buy-to-let or downsizing.

1. Buy-to-let

With the boom in property values in recent decades, many people have chosen to build buy-to-let property portfolios, sometimes with a view to funding their retirement.

However, the buy-to-let market is changing principally due to new regulations and tax reforms, which included changes to mortgage interest tax relief for landlords.

Some other things to consider when it comes to buy-to-let properties are:

  • There are no guarantees that property prices will rise as strongly as they have in previous years
  • Buying, maintaining and selling a property is time consuming
  • Not all tenants will pay on time
  • You usually need to pay Capital Gains Tax when selling a buy-to-let property: the gain is added to your income, any part in the basic rate band is charged at 18% and 28% for higher and additional-rate taxpayers.

2. Downsizing

Another common way that people use property to fund their retirement is by downsizing: raising money by selling their existing home with the aim of buying something smaller and cheaper. 

However, it’s easy to overestimate how much money you can make by downsizing as smaller houses aren’t necessarily much cheaper.

Other considerations include:

  • If you sell your own home and downsize there are costs involved with moving like stamp duty and legal fees
  • It can be hard moving if it means moving to a new area away from friends and family.

Investing in a pension

Pensions are the most common way to save for retirement, as they offer many advantages.

One of the most significant benefits of saving in a pension is tax relief. So, for example, if you pay in £80, then HMRC would add a further £20, giving you £100 in your fund. If you pay 40% income tax, then you can reclaim up to an additional £20 via your tax return

Other benefits of investing in a pension include:

  • Unlike buying a property, where you are likely to need a big deposit, you don’t need a lump sum to invest in a pension. Instead, you can save little and often
  • You can buy a guaranteed income for life with your pension fund at retirement
  • In most cases, your employer will pay into your pension fund too; you could think of it like a pay rise. And the employer will not have to pay National Insurance contributions on these payments
  • From the age of 55 (57 from 2028), you can choose how you take your money from your pension fund: as a lump sum or a guaranteed income for life, or leaving it invested and taking income or lump sums when you want to
  • Pensions sit outside your estate and are not normally subject to Inheritance Tax when you die.

What about the downsides?

Your pension will be invested in the stock markets, and the value of your pension will depend on the performance of the underlying investments, so you should always be prepared for an element of risk. The price of shares and other financial assets go down as well as up, which is why you should consider pension saving as a long-term investment.

So what should you do?

How you plan for your retirement depends on your own individual circumstances and goals.

But investing into a pension is a good start: as well as saving regularly for a comfortable future, you get help from the Government and your employer for doing so. So, it’s wise to start early and pay in as much as you can afford.

Using property can provide valuable funds for retirement. But it is wise not to rely on it entirely for your retirement income. Instead, you could use it to supplement other sources of income, such as a pension.

How you provide for your retirement is an important decision. Speak to an NFU Mutual Financial Adviser who can help you to make the right choices, call 0800 622 323.

The tax treatment of pensions depends on individual circumstances and may change in the future.

The value of pensions can fall and you may get back less than invested.

When you get in touch, we’ll explain the advice services offered and the charges. NFU Mutual Financial Advisers advise on NFU Mutual products and selected products from specialist providers.

Inheritance Tax advice is not regulated by the Prudential Regulation Authority or the Financial Conduct Authority.

Financial advice is provided by NFU Mutual Select Investments Limited.