Property or pension in retirement? Maybe blending is the answer

The property vs pensions debate often runs hot, yet a sensible strategy when thinking about funding retirement may not be a case of one or the other – but a considered combination of the two. It is therefore worth exploring the pros and cons of both assets and how changing rules may affect your decisions, and your outcome.

We also examine the essential nuances so you can blend the advantages of property and pensions: to help you maximise your comfort later in life, and to optimise how you pass on wealth to your family.


Both property and pension values tend to grow over time


It is understandable why people may choose to invest in property over their lifetime: it is a tangible, easy-to-understand asset and has been shown to grow in value over time. Pensions, too, have confirmed their worth in retirement, with recent changes giving individuals much more of a say over how and when they access their pensions – while allowing their funds to remain invested and potentially grow.


We can see the growth of UK property prices below and how this growth (and sometimes declines) changes from year to year. Equally, pension growth would have benefited from the rise in equities, with the FTSE 100 delivering total returns of 1,926% from its inception in 1984, a mean yearly return of 8.71% (Source: Bloomberg – from Jan 1984 to June 2021).


UK house prices and annual growth rates



Source: Nationwide Building Society House Price Index.


Aside from their growth attributes, both assets have their advantages and disadvantages: you can invest as much as you like in property and access your investment whenever you like – but finding a tenant or buyer could be arduous, and the tax breaks are not what they were. Pensions give you great tax relief on contributions and tax-free growth and income – but there are limits to how much you can contribute, and you can only access them after age 55.


Yet it is clear that investing in either, or both, is a much better option than not investing at all due to the effects of inflation. The key for those who are thinking about retiring in 10 to 20 years is to see how best to potentially combine and maximise the allowances and efficiencies of both options to ensure you and your family benefit the most.


Key differences between BTL property and pensions


To ensure your retirement fund is as efficient as possible you should consider the differences between property and pensions – and the trade-offs you may have to make to reach your objectives.


The table below covers the main differences between buy-to-let properties and investing in a pension. As you can see, property affords investors a great deal of freedom: they can use leverage, invest as much as they like and access their investment whenever they choose. 



While you have the freedom to populate your pension with a wide variety of assets it is the tax advantages of pensions that are compelling: tax relief when you pay in, tax-free growth and income, and the assets accrued are not subject to inheritance tax.


Yet there are constraints for both assets – you can only contribute so much to a pension and while you can sell a property whenever you wish, it might be impractical to do so quickly and for the right price.


So to make the most of your retirement fund, understanding the intricacies of each asset and the interplay between them will help you to maximise the opportunities from both.


Tax rates and rules to be aware of


Regulations continually evolve. It is therefore crucial for those who are planning for retirement to be aware of the rules which could have a material effect on their future. Knowing about the changes can also help you to be more agile and adapt – to explore your options, and to maximise the benefits from both property and pensions.


Pension rules and tax rates


  • The annual allowance is the amount you can contribute to a pension each year and receive tax relief. It is currently set at a maximum of £40,000, if you have sufficient earnings, and for higher earners this can be tapered down to as low as £4,000.
  • The lifetime allowance (LTA) is the overall limit of pension funds you can accrue over your lifetime before an additional tax charge could apply. It is currently set at £1,073,100 and has been frozen at this level until 2026. Each time you take benefits from your pension the amount crystallised will be tested against your LTA. There is then a final test at age 75.
  • Pension freedoms have given you lots of flexibility in how you access your retirement savings after age 55. You can crystallise benefits in tranches, take tax-free lump sums, variable income amounts or leave them to grow for the future.
  • Pensions are outside of your estate for inheritance tax and can be accessed by your beneficiaries completely tax-free if you pass away before age 75, or at their marginal income tax rate after 75.


This is not financial advice. Tax rules are subject to changes and you should consult a tax adviser before acting on any information in this article.


Tax and rules for second properties


  • 8% of additional Capital Gains Tax (CGT) on top of your marginal rate taking the top rate of CGT to 28%.
  • 3% of additional Stamp Duty Land Tax (SDLT).
  • Transition from mortgage interest deduction to Mortgage Interest Relief. Relief tapering down to only 20% in 2020/21.
  • Furnished Holiday Lets are treated as a business and so can be eligible for full mortgage interest deductions and can benefit from entrepreneur’s relief on any capital gains, potentially reducing the tax rate to 10%. However, there are strict rules on how a property qualifies as a furnished holiday let which you will need to keep in mind.


This is not financial advice. Tax rules are subject to changes and you should consult a tax adviser before acting on any information in this article.


Saving for retirement head-to-head – property vs pensions


This example below could be a scenario that many investors find themselves in, whether they are using property to fund retirement or a pension. Figures show the outcomes over 1, 10, and 25 years. Pensions = dark blue, Property = grey. We also make some assumptions:


  • Higher rate taxpayer with an income of £100,000.
  • Pension contribution of £80,000 gross. Assumed pension growth rate of 5% per annum.
  • Net of tax equivalent of £48,000 used as deposit with 75% LTV mortgage for a property worth £192,000.
  • 3% yield net of expenses. Assumed property capital growth rate of 2% per annum.
  • Mortgage interest rate of 2%.


How pension and property assets can grow over time



Calculations by Netwealth. Values shown assume that relevant taxes are paid to crystallise the investment.


Analysing the scenario above


The investor has cash to invest and is considering making either a relatively large pension contribution or using the same cash as a deposit to buy a buy-to-let property.


While the full allowances and tax benefits for both can be challenging to assess, they are taken into consideration here. We factor in such details as gross and net contributions, stamp duty, mortgage interest relief and CGT, among others.


What the numbers above don’t cover are the differences in ongoing administration required for properties and pensions. Properties will normally require more active management even if you have a letting agent in place as you take on new tenants, carry out maintenance and re-mortgage over time.


The implications upon death can also be quite different. For a property investment you will benefit from an uplift to the base cost for the property at death so no CGT will be due. However, the property will fall within your estate and so potentially be subject to IHT at 40%. The money in a pension would go to the beneficiaries without them having to pay inheritance tax and depending on their age at death there could be no tax to pay when taking the funds from the pension.


Working out how long your pension could last


How much can I draw from my pension is one of the most common questions we get asked. People generally understand they need to be invested for their future, but it can be difficult to assess how much an investment portfolio will generate. How long will it last? What happens if my circumstances change? Can I see the effects of different permutations and how that might affect my outcome?


Our powerful online tools give investors a clearer view of how their future might unfold. You can make projections based on your target monthly income (eg, £2,000), while also taking into account inflation (eg, 2%) and for how long you may need your money to last (eg, 25 years).


The tools can help you to model various scenarios to see if your planned contributions could help you to reach your goals. You can change variables such as tax rates, risk level, contributions and withdrawals to help you decide if you need to adjust your plans, or whether your objectives are realistic.


How blending assets could provide an even better outcome


We can use a case study to help us project how someone can make the most of their pension and property funds in retirement. By using their allowances and by combining the access to their assets smartly, they can release their funds very efficiently, and make them last longer.


- Annabel is retired at 60, with a £1m pension in drawdown

- She is aiming for a net income of £2,750 a month

- She invests the 25% tax-free cash allowance in a general investment account (GIA) to support her income

- Each year Annabel makes use of her ISA allowance from her GIA

- She invests in a global mix of shares (60%) and bonds and cash (40%) – based on Netwealth’s Risk Level 5 portfolio

- Her main goal is income for her retirement, then to pass on the remainder to her children.


Rather than drawing from her pension first, Annabel draws from a combination of her pension and GIA/ISA. The outcome means that, in the average scenario (shown by the dotted line below), she will have £461,000 remaining in her pension at age 95 – which is outside of her estate for IHT purposes and can be passed on to her family tax free.


Drawing from a combination of pension, general investments and ISA



Source: Netwealth

Simulated historic and future performance numbers should not be relied upon as an indicator of future performance.


Now let’s look at the scenario if the other assumptions are the same and she releases £250,000 in equity from a property after 10 years. By doing it this way, and adding £250,000 into the pot, Annabel’s funds don’t grow to £650,000-£700,000 as you might expect. By creating a more efficient structure, there is actually £1.2m in the pension at age 95, in the average scenario. And again, this sum is outside of her estate for IHT purposes and can be passed on to her family tax free.


Drawing from previous assets + releasing equity from property



Source: Netwealth.

Simulated historic and future performance numbers should not be relied upon as an indicator of future performance.


The above scenarios are just an example of how blending can make the most of investments for you in your retirement, and to maximise the benefits for your loved ones after you have passed away.


In summary


Choosing property or a pension to fund your retirement is not as straightforward as it may appear. And your individual circumstances and preferences will always have a big part to play in your selection.


Yet there is a strong case to plan ahead and combine the best attributes of both assets to achieve your objectives. This will often require some thoughtful analysis and examination of the various permutations – but given enough time, the effort could make a meaningful difference to your future.


Please get in touch with us at any time and let our experts guide you or give you the specific advice you need – with a tailored analysis of your situation – to help you and your family make the most of your retirement.



Please note, the value of your investments can go down as well as up.


Netwealth offers advice restricted to the services provided, and does not provide independent advice across the market. Netwealth does not provide advice in relation to tax, insurance or estate planning.

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