The following is a transcript of our monthly podcast, The Pension Confident Podcast. Listen to Episode 4 here, or scroll on to read the conversation.
PETER: Welcome, everybody to episode four of the Pension Confident Podcast. I’m Peter Komolafe, and today we’re going to be asking the question: Is buying a property actually a better way to fund a happy retirement as opposed to investing into a pension? You’ve got it, we’re wading into the property versus pension debate.
So, when it comes to retirement, some people will say that their home essentially their pension fund, and data from the Office of National Statistics suggest that one in four people, that’s a quarter of people here in the UK, regard their home as their retirement fund, essentially. And it’s easy to see why, the property market has performed extremely well over the last few decades, by far outstripping inflation, but is investing in property really as safe as houses?
To get the full picture and, spoiler alert, see why in fact, investing in property at the expense of your pension just might cost you later on, stick with me. But just to begin, though, our usual disclaimer. Anything that we discuss here on the podcast should not be considered as financial advice. When you’re investing, your capital is at risk. Now I do have three experts with me. I’m joined by Rachael Oku, who is the VP Brand and Communications at PensionBee, I’ve got Abba Newbery, who is the Chief Marketing Officer at online mortgage broker, Habito and Ken Okoroafor founder of the Financial Joy Academy, and The Humble Penny, a personal finance website with a mission to helping you create financial independence. Welcome, everybody. How is everyone this morning?
RACHAEL: Very well, thank you.
PETER: Thank you so much for being here. So, to begin with, I just want to take a little bit of a straw poll. Do you consider yourself as one of the one in four who believe that their home is essentially going to be their retirement pot?
RACHAEL: I wouldn’t say that I’m against having an investment property later in life.
PETER: Good, Abba?
PETER: Okay, Ken?
KEN: Yeah, no, I’m definitely a fan of property, but not having all my eggs in one basket.
PETER: Okay, good to know. Now, to kick this off, I do want to get into how we actually got here looking at the markets, particularly. Now Abba, in the UK we’ve had this obsession about owning property and owning our property for a long time. Has this always been the case?
ABBA: Certainly, we do seem to have a greater obsession in the UK about property than other European nations and certainly, if you take going back to the 1980’s, and the right to buy that came through with Margaret Thatcher, that certainly seemed to fuel a surge in interest in owning your own property.
KEN: Well, I just think that in this country, we are obsessed with security more psychologically than in other parts of the world. So, if you think about like you watch TV, a lot of our TV shows are really about how you save money. There’s a much bigger drive towards having a level of security and I personally think that might be a reason why there’s just this huge drive for people to own their own home and that sort of stuff, compared to other parts of Europe, where it’s actually pretty okay to rent and see that as the thing to do.
PETER: So, Rachael, it’s fair to say in contrast, that pensions haven’t quite captured our imaginations as much. In fact, there is a study by Unbiased that says that one in six of the over 55’s haven’t actually paid into a pension at all. They have no savings. Why do you think that is?
RACHAEL: Well, I think there are a lot of reasons why people aren’t actually saving as much as they should be for later life. You know, we’re really woefully underprepared in the UK because people think that pensions are quite complicated, which means that they don’t take the action that they need to. They’re quite scared of making the wrong decision, which will affect their later life. Before auto-enrolment moment was introduced a decade ago, people didn’t have workplace pensions necessarily. People weren’t able to save as they are now. And then finally, if we’re comparing property to pensions, I think property is a lot more aspirational. I think you can plan to buy your dream home and its lot more exciting to have all the latest gadgets, to have all of those things and to achieve them now, is much more tangible than paying into a pension that will kind of come back to you when you’re sort of 55 or 57 from 2028. And, yeah, I think that’s the main difference. It’s quite hard for a pension sometimes to compete.
How did we get here?
PETER: The question is, do you believe that from a financial point of view, long term, that paying off your mortgage, faster and quicker, is a better retirement solution than a pension? I’m going to start with you, Rachael.
RACHAEL: Sure. Okay. So, I think the desire to use your property to fund your retirement is quite a common one. But I think sometimes people overlook the practicalities of that. I think if you’re an investor, you have buy-to-let properties then it’s quite different. You sell them off, maybe as you approach retirement, or you keep generating that additional income, but when you’ve got on the ladder, you’ve finally ended up in your dream home, the thought of actually having to vacate that when you get to 55-65, whenever it is that you want to retire, I think can actually be quite difficult for some people. Because if you want to free up some of the money or all of the money, you can’t stay in the property, usually. And I think that presents some challenges, especially when someone has worked for this their whole lives, they’ve finally achieved it and yeah, I think downsizing just isn’t always what people actually want to do by the time they retire. And then, of course, if you’re unfortunate enough to be coming up to retirement age, when the market is in a decline or it’s dipping, then you are quite hamstrung on what your options are. If you need that immediate cash, you may have to sell your property for a reduced price whereas a pension would still have more opportunity to grow.
PETER: What about you Abba? What do you think? Do you think that property may be a potential faster way or better way of actually acquiring a pension fund versus maybe a tandem approach?
ABBA: I think lots of things related to this question. I think the first thing is we’re talking about retirement as if it’s something that’s going to happen at 60 or 65. It is not. If you take the statisticians, kind of the generation, these guys sat next to me are going to live to 90+, probably to 100. So, your attitude towards pensions and saving, I think, has got to fundamentally change. I kind of grew up with parents who taught me that you’re going to get a final salary pension, so don’t worry about that. You’re going to get a State Pension, don’t worry about that. And that was kind of the 80’s generation, so pour everything into property. If you’re thinking about retirement being something to do at 65, you now need a pot of money that’s going to last you for another 35 years, another practically kind of half the life you’ve already lived, again. And so, I don’t think of it as a binary question. And I totally agree with your point about downsizing. I think one of the real fundamental blockers in the property market at the moment, which is hindering first time buyers’ kind of getting onto the market and holding up the prices is people living in their big family homes, that they now no longer need. But yes, older people aren’t selling their homes as their retirement fund, and that’s in part because they’ve got their final salary pensions, they’ve got the state funded pension, that’s not going to be the same for my generation or for your generation going forward, which may end up being a very good thing.
PETER: What about you Ken?
KEN: Obviously property gives you this gratification. You can see it, you can touch it, you can even paint it. You can do, you can shift rooms around, can do whatever you want. I think there needs to be - we need to get better at helping people visualise the benefits of their pensions. So, helping them to actually see like, “Man, this is really worth my while”. Because a lot of people say, “Nah, forget that. Pension, no way man. Not putting money into that” because they see as “I can’t access the money, so therefore, I can’t - there’s no point”, when in actual fact, that’s actually an advantage. The second thing I’d say is that we need to close the behaviour gap. There’s a gap that exists between where people are and where people want to get to and the thing that separates them, those two things is really changing kind of the way people operate, lifestyle and subscription to a life of living in debt and living on your credit cards. And, you know, living in the Instagram life. These are the kind of things that my generation, like, we need to kind of address. We’re not gonna close it fully but if we just narrow in on that gap between where you are, and where you want to get to. Just narrow in a little bit, the result you get, the output you get, is more money in pensions. More money in a buy-to-let or more money in… this is what actually happens. And if you think about what happens when you close that gap a little bit, is you’re really simplifying your lifestyle a little bit.
RACHAEL: I was just going to say, I think something that both Abba and Ken have mentioned, which is obviously completely true is that things are changing. The world of work is changing, we are living longer. The way that we come to interact with our pensions is going to change. I think earlier, speaking directly to the one in six over 55’s are underprepared, but I think, as the younger generations get to that age, I think absolutely the days of retiring at 66, which is currently the State Pension age, I think that will all become quite blurry. Whether or not there’ll be an adequate State Pension to retire with is another question that we can’t really guarantee at the moment. It’s going up and up and up. So where will that end up? At what age will you be able to rely on getting the State Pension? But I think we’re gonna see more people working for longer, as you said. Maybe following their passions later in life and just generally having income coming in from a few different sources, not just their pension.
PETER: And Ken coming to you, I know that, you know, obviously with the work that you do, you’ve got the Financial Joy Academy, which is there to help people build financial independence. You recently became mortgage free. You did that at age 34, which for many people is incredible. It’s the absolute dream, congratulations on that. Surely you had to sacrifice paying into a pension in order to make that happen? And if so, why? How did that actually compute in terms of your train of thought?
KEN: Okay, so, fantastic question. So, for me, I’ve always sort of thought to myself, what kind of life do I really want? And for me, that life involved lots of optionality, just being able to do what I wanted, when I wanted with my time. And one thing that really stood partly in the way of that was the mortgage for me. It took us seven years to pay the thing off and -
PETER: Why was paying off the mortgage the most important thing for you?
KEN: For me, that mental freedom was a big thing. The second was, it reduced our cost of living, and gave us more financial freedom, because essentially, like for us, now, it’s council tax, it’s light and heat and things like that and obviously travel and the things we find to be fun. But beyond that, it’s - our cost of living is much lower and it’s giving us that capacity to take more risks than I would have if I had something hanging over me.
RACHAEL: You are in a fantastically fortunate position. But for most people, the struggle is to get on the property ladder. The struggle is paying into a pension and saving up for the deposit on a house. So actually, it’s that struggle, that I guess, possibly because the average age of our customer is 42 that we’re seeing that end of the struggle more than the overpaying struggle.
PETER: Ken just mentioned there, obviously paying off his mortgage allows him a little bit more freedom. I wonder, is that something that would appeal to you in your own personal circumstances at all, Abba?
ABBA: No, I’ve chosen not to pay off my mortgage early. I think the opportunity to use your house as leverage is important. And the lifestyle I’ve chosen to live with my family means that, yeah, I could have bought a much smaller house and been mortgage free, but I’ve chosen to live a slightly different lifestyle. I’m incredibly lucky. I live in London; I own a house in London. I’ve seen enormous increase in that property. I managed to get on the ladder about 20 years ago. So, I’m a very, very lucky person.
KEN: Really interesting insight from you. I think one thing COVID has done, is COVID has made people look at money from the perspective of lifestyle. So, what do I really want for my life? has become a bigger question. I’m seeing this in comments. I’m seeing this in emails. I’m seeing this in DM’s. People are now asking a different quality of question, which is, what do I ultimately want down the line? “Yes, okay, I’ll buy a house”. Like, “Okay, that’s a pit stop, rather than the end goal. What comes after that?” And I think this is where the question of like, are we creating the right products for consumers? And things like that becomes interesting, because I think it’d be fascinating if I ran an organisation that’s providing mortgage products, I would be leaning into the trends. Which is, go and look at like my generation, the millennials, and the Gen Z’s coming after, who are inevitably going to be leading this country in the years to come. Those people want something else.
PETER: Would you add to that, Rachel?
RACHAEL: Well, I just wanted to come back on something that I thought was interesting around millennials, and then Gen Z. Around millennials and Gen Z, sort of redesigning their lives and how this is something that has sort of come out of the pandemic. I think even before that, we were seeing a change in the pensions industry. People used to have a job for life, they used to have one or two jobs and be quite happy. The ambition was to get a good job to buy your house and that was kind of it. You know, it’s not a bad life. It’s a good life, but I think things have changed. The world is slightly different now and the DWP estimates that people will have around 11 pensions in their career, and obviously auto-enrolment introduced 10 years ago is making people pay into those 11 workplace pensions so that now means up to 11 pensions potentially. The industry’s been quite slow to catch up in terms of making consolidation simpler and making it really easy to actually manage all of these pots and to bring them together so that you can better plan for your retirement.
The case for investing in your pension
PETER: Rachael let’s compare the return on investment versus property. So, data from Halifax suggests that UK prices have gone up by around about 200% over the last 20 years, whereas the main US stock market the SNP500, where a proportion of diversified pensions are likely to be invested, have generated total returns of over 400% over the same period according to Investopedia. Of course, we should bear in mind that past performance isn’t indicative of future performance, and the value of investments can go up as well as down. But is this the reason why you’re so keen on pensions over property?
RACHAEL: Investment growth is one of the key aims of investing. You want your pension and any savings to grow over time. But with pensions, that’s only really part of the story, there are lots of incentives. So, if you have a workplace pension, your employer, as you said, with auto-enrolment, they’re obliged to contribute. So, you’re effectively getting free money from your employer, which is why you shouldn’t opt out unless extenuating circumstances and you really, really have to. But your pension will grow a lot faster if you remain opted in. And then there’s also tax relief that you get in your personal contributions. So, most basic rate taxpayers will get a 25% tax top up. So, if you paid £100 into your pension, the government would add £25 pounds, you’d have £125. So over time with regular contributing that just snowballs. It just grows and grows, and then you also get tax free withdrawals when it comes to taking out your pension. So, from the age of 55, the first 25%, you can withdraw as a tax-free lump sum and then there are also incentives when it comes to passing on your pension. So, pensions sit outside your estate for inheritance tax purposes, which means unlike the cash in your bank account, you don’t have to pay tax on it in the same way. So, with a pension, if you pass away before you’re 75, your beneficiaries can in most circumstances, they can take that tax-free. And then if you’re over 75, that your beneficiaries will pay tax at the nominal rate. And that’s with defined contribution pensions, which most modern workplaces and personal pensions are.
PETER: So, Rachael, we know that about a quarter of self-employed people currently aren’t paying into a pension, and there’s a lot of them. So, what advice would you have for that group of people?
RACHAEL: So, if you’re self-employed, unfortunately, won’t have a workplace pension, which your employer will be contributing into. But you do have two options. So, if you’re making personal contributions to your pension, you will still qualify, usually for government tax relief. So, for every £100 pounds you put in, the government will put in 25. So, it’s 25% tax top up that you’ll get. If you’re the Director of limited company, you can also contribute directly into your pension as an employer and usually these contributions are tax deductible.
PETER: Yeah. Is it going to help you reduce your corporation taxes, essentially?
KEN: Well exactly, this is actually a really important point, because a lot of people I know who run - lots of my friends are entrepreneurs now. You tend to hang around people who do what you’re doing or something quite similar. A lot of them don’t actually know that within a limited company, if you’re registered as a limited company, you can set up your own pension, and your business can contribute into that and it’s 100% tax deductible up to around £40,000 and this is quite good.
The case for investing in your property
PETER: So, Abba, I was going to ask you, when you invested in pensions and global markets, do you typically get a little bit of diversification, because you’ve invested in different areas? With property, it’s almost as though you’re putting your eggs all in one basket, are there any other risks in the property side of things that you can think of or that come to mind that you think might be important to this conversation?
ABBA: I mean, I guess if you look at it holistically, and you see property as a long-term investment, it’s a pretty darn safe, long-term investment in this country. So obviously, particular postcodes haven’t all seen the same kind of increases, but if you’re looking to borrow over 25 years, for most people in those 25 years, that house that they live in, has grown in value, if you kind of look retrospectively. As you said, I said it’s 100% every 10 years. I think you said that Halifax said it was 200% in 20 years. So yeah, property is a reasonably safe investment. Obviously, that does mean you’ve got to keep up your mortgage repayments and that kind of stuff and coming with that comes, you know, if the roof blows off or the boiler blows up, that becomes your responsibility. So, having your emergency fund is pretty important. And obviously picking the right area with the right kind of school because I guess the other thing that’s quite interesting about property is we have this notion of a property ladder in the UK where you buy your first house and then you buy your next house and it’s bigger and of course, that very notion costs you a lot of money. Be it more re-mortgaging costs, conveyancing costs, legal work costs and obviously stamp duty. So I guess like if I was going to give someone advice, which I’m not allowed to do, but buy the biggest house that you can in the best area that you can and then try and never move, and then put that money that you would have paid on stamp duty to the next house into overpaying your mortgage or into your pension. But don’t keep moving because it costs a fortune.
PETER: Thank you everyone for being here and contributing to this debate today and I hope that if you’ve been listening to this, you found this useful. If you do want to access any of the data or any of the articles or resources that we mentioned in today’s episode, you can find links to those in the show notes to this podcast. A final reminder that anything that we’ve discussed on this podcast should not be regarded as financial advice. Again, with investing your capital is always at risk.
Thank you so much for listening and as you know, we love to hear your feedback and thank you to everyone who has given us feedback already. We always encourage you: do not hold back whether your feedback is good or bad, we do need to hear it. And if you have any questions about pensions, you can get in touch with us at the Pension Bee team. You can email either firstname.lastname@example.org. That’s email@example.com or you can use the Twitter handle at @PensionBee. We’ll be back next month. In the meantime, keep saving and stay pension confident.
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.