When it comes to planning for retirement, choosing the right investment strategy is crucial. Two of the most popular options are investing in property and contributing into a Pension fund. Each approach has its own advantages and drawbacks, and the best choice often depends on individual circumstances, risk tolerance, and financial goals.
We breakdown the strengths and weaknesses of each option and analyse which could work for you.
The advantages of investing into a Pension fund
A Personal Pension is a long-term investment that you build-up during working life so that your retirement is not spent worrying about money.
Though they can seem complicated, the basic principles of Pensions are quite simple – you’re essentially putting aside some money now so that you can use it later.
Your personal contributions receive tax relief from the government, if eligible. This means that as well as the money you’re putting in, some of your money that would have gone to the government as tax now goes into your Pension pot instead.
This makes a Pension one of the most tax-efficient ways to save for life after retirement.
Similarly, Workplace Pensions also provide a way of saving for your retirement. Your employer will pay a contribution alongside your contribution, and you’ll also benefit from tax relief. This can be an effective way to build a nest egg, as you can pick where to invest your Workplace Pension as all offer a range of funds, in addition to the default fund.
Pension funds are managed by professional investment managers who have the expertise and resources to make strategic decisions to maximise returns and minimise risks. With investing, capital is at risk.
Pension funds can also typically invest in a diversified portfolio of assets, including stocks, bonds, and other securities. Simply put, diversification is not putting all of your eggs in one basket. In an investment context, your investment may be split between regions. It is an investment strategy based on the premise that a portfolio with different asset types will perform better than one with few, aiming to reduce risk and potentially lead to more stable returns.
It’s also worth noting that volatility is a normal part of long-term investing. There is plenty to unnerve markets and cause this, from changes in commerce to political outcomes, as seen with Brexit, global events such as Covid-19, the invasion of Ukraine and corporate actions. However, over the long term, Portfolios have performed well, ranging from Defensive to Aggressive. For example, True Potential Balanced Portfolio has achieved 58% growth since its launch in 2015. Below is a table showing the five-year discrete performance.*
*Data sourced from True Potential Investments. Portfolio as of 31/07/2024 and figures accessed on 14/08/2024.
It’s important to remember that, as with all investing, your capital is at risk in a Personal Pension. Investments can fluctuate in value and you may get back less than you invest. Past performance is not a guide to future performance.
The disadvantages of investing into a Pension fund
Pension funds often have restrictions on when you can access (usually not until a certain age), which can limit flexibility. For example, once funds are committed, you can’t access the money until age 55 (rising to 57 from 2028).
Although, given that the whole purpose of a Pension is to invest for retirement, some may not consider this too big of an issue.
Another potential drawback to saving into a Pension is the fact you are restricted to contributions of up to £60,000 per year by the “Pension annual allowance”.
You’ll only pay tax if you go above the annual allowance and you’ll get a statement from your Pension provider telling you if you exceed this in their scheme.
The level of Pension income could also change due to investment/fund performance. Pension funds are still subject to market risks – while diversified – and economic downturns can affect the value of a fund, potentially impacting retirement income. Pension funds also typically charge management fees.
The advantages of property investment
Property investment provides a physical asset that can be used, lived in, or rented out, providing flexibility in terms of usage and a sense of security for many investors.
Property owners also have control over their investment with regards to rental terms and selling. This can be beneficial for those who prefer to manage their assets directly.
Property values could also increase over time, typically with inflation, potentially providing some capital appreciation. This appreciation can lead to capital gains when the property is sold.
Furthermore, owning rental property could provide a steady income stream, which can supplement retirement income. Property values and rental incomes can also potentially increase with inflation, helping to maintain the purchasing power of your investment. With investing, your capital is at risk.
The disadvantages of property investment
The upfront costs of purchasing property can be substantial, including the down payment, legal fees, and ongoing maintenance expenses. Owning a property also requires dealing with tenants, which can be time-consuming and costly, especially if you are looking to wind down in retirement.
You’ll also likely come across additional costs such as Stamp Duty Land Tax, as well as other fees for conveyancing and surveys. Stamp Duty Land Tax is usually paid on increasing portions of the property price when you buy residential property, for example a house or flat, and only applies to properties over £250,000. You may be eligible for relief if you’re buying your first home.
Second and additional residential properties in England and Northern Ireland normally carry a 3% surcharge on top of the standard rate of Stamp Duty.
Property markets can be volatile, with prices subject to fluctuations (economic conditions, interest rates, changes in the local area and other factors). This volatility can affect the overall return on investment and so it may be worth considering what your property might be worth when you choose to sell it.
You may need to pay Capital Gains Tax on the profits you make when selling a buy-to-let property or second home, but generally you won’t need to pay the tax when selling your main home. All taxpayers have an annual CGT allowance, meaning they can earn a certain amount tax-free. In the 2024-25 tax year, you can make tax-free capital gains of up to £3,000.
Selling property can also take time and may involve other significant costs such as legal fees.
Choosing the right option to fund your retirement
It’s never too late to open a Pension and start contributing to a pot that can benefit from tax relief and compound interest.
However, a rounded retirement plan requires advice as to what is best suited to your personal circumstances and to determine the most appropriate means of funding your retirement income needs. You can also get free, impartial guidance from MoneyHelper. You can contact them on 0800 138 7777.
We’re always here to help you do more with your money and investments. If you’re a True Potential client and would like further support with investments, you can also call our Relationship Management team on 0191 500 9164. They’re available 7am – 8pm weekdays and 8am – 12pm on Saturday.
If you’re not a client, you can call one of our experts on 0191 625 0350 to learn more.
With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. This material is not a personal recommendation or financial advice and the investments referred to may not be suitable for all investors.
Tax is subject to an individual’s personal circumstances and tax rules can change at any time. Pension eligibility and tax rules apply.
You should ensure your contribution does not result in your total Pension contribution within the tax year exceeding £60,000 or 100% of your earnings, whichever is lower.
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