Pension versus property - Britons planning for retirement urged to consider pitfalls | Personal Finance | Finance

May 18, 2021

Pensions boast sizeable tax benefits, meaning they're fundamental to retirement planning for many. In recent years though, many people have become drawn to the idea of purchasing a buy-to-let property and using the rental income to fund their retirement.

Financial planner Taina Moran, of Tilney, recently shared her expertise on property investments and pensions.

Why are buy-to-let properties popular?


"I have a number of clients with buy-to-let properties, and I understand the appeal of bricks and mortar," Ms Moran said.

"It feels safe because it’s tangible. And, as many of us already own the house that we live in, we feel that we have more of an understanding of the process of buying a property.

"Pensions, with all their rules and legislation, can feel alien so the idea of putting all of your hard-earned money into something you’re not completely sure of can be intimidating."


"There is a high demand for rental properties across the UK but when looking at your own buy-to-let property, this will often depend upon the type of tenant you wish to attract.

"For example, if you are looking to rent the property out to students and there is a university nearby, it seems logical that your property will be in high demand and you will not experience many empty periods."

Capital growth and investment income

"With property prices rising year on year, many property investors receive capital growth on their buy-to-let property when they come to sell it.

"This, in addition to the ongoing rental income they receive, makes buy-to-let properties a popular investment choice.

"Please do bear in mind that as with any investment, the value of a property can fall as well as rise and you might receive back less than you originally paid."

So, what does a person need to consider before purchasing a rental property?

Ms Moran said: "Owning a rental property is a massive commitment and you’re in it for the long haul when you become a landlord."

"Often, my clients who are thinking of buying a rental property are drawn to the appeal of a regular rental income and capital growth on the property," the financial planner said.

"While this is a valid point, you need to remember that you will pay Income Tax on the rental income.

"You’ll need to pay Capital Gains Tax if you sell it and it’s not your only property."

Affordability during empty periods and agency fees are other considerations to factor in, she added.

"You need to consider if you can afford to pay the mortgage if you have a period where you have no tenants," said Ms Moran.

"If you’re going to go through a letting agent, you need to factor their charges into your monthly budget too."

The need to pay for ongoing work is also something to think about.

"As many of us are aware, all properties need ongoing maintenance and work and as a landlord, the responsibility to keep this up rests with you," said Ms Moran.

"Personally, I’m a big fan of DIY in my own home, but I’m not sure if I would want to do this for a rental property, especially as I get older.

"If you’re not going to maintain the property yourself, you need to make sure that you can afford to pay a professional to do this for you."

There are a number of other costs to take into consideration when buying a buy-to-let property, the financial planner pointed out, and these include:

  • The sizeable legal costs
  • Stamp duty land tax (in England and Northern Ireland)
  • Land and buildings transaction tax (in Scotland)
  • Land transaction tax (in Wales)
  • An additional dwelling supplement. If you buy a rental property which costs more than £40,000, you will pay an additional dwelling supplement of three percent (in England, Wales and Northern Ireland) or four percent (in Scotland) of the purchase price
  • Furniture, if you are going to let the property out as furnished
  • Landlord insurance.

"So there are a lot of things to consider when buying a buy-to-let property – they make pensions look simple."

The financial planner also discussed the benefits of investing in a pension, including tax efficiency.

"One of the main advantages of pensions are the generous tax breaks you are given on any contributions made," Ms Moran said.

"These are especially useful if you are a higher or additional-rate taxpayer, but even basic-rate taxpayers will benefit in the longer term.

"The Government will automatically pay 20 percent of your contribution.

"Higher and additional-rate taxpayers can claim another 20 percent or 25 percent tax refund back through their tax return.

"In practice, this means that a contribution of £100 would only cost you £55. Pensions also grow free of Income Tax and Capital Gains Tax.

"You will not receive this tax relief if you purchase a buy-to-let property."

Flexible access is another aspect of pension investments which could appeal to some.

"When you take your pension, there is a great amount of flexibility over how you access it," the financial planner said.

"You can:

  • Take ad hoc, lump sum withdrawals
  • Buy an annuity to secure a fixed income
  • Go into income drawdown and take a variable income from your pension
  • Leave it invested and take an income from other sources, such as an investment portfolio.

"This type of flexibility just isn’t possible with a property investment."

What happens upon death is another aspect which some may decide to look into.

Ms Moran explained: "On death, your pension will fall outside your estate. This means that no matter what age you are when you die, your pension is inherited free of Inheritance Tax.

"If you die before you reach 75, your beneficiaries will not pay any Income Tax on any money they take out of it.

"If you die after 75, they will be taxed on any withdrawals at their marginal rate.

"A property cannot be passed on in the same way. The residence nil rate is not applicable to a rental property and if your estate (including the rental property) is valued at over the nil rate band (£325,000), your recipients will pay 40 percent in Inheritance Tax on the excess."

She added: "It’s quick and easy to set up a pension plan and then contribute to it directly.

"The process of buying a property is far more complicated and can take a lot longer to complete."

There are some things to bear in mind when investing in a pension.

"It’s evident that pensions have a large number of benefits, but please do bear in mind that they are a form of investment and you may get back less than you originally contributed," Ms Moran warned.

"Pensions are also subject to ongoing provider costs, so it’s important that you check these charges and monitor their performance regularly to ensure the plan meets your retirement needs."