When it comes to our finances there are a number of decisions we have to make, including which savings account to choose or how to budget each month. The amount of money we invest for our future, whether that be in a property or a pension, is another common debate.
Many people in the UK aspire to own a property and, for some, they want their property (or properties) to eventually fund their retirement. But recent data from the National Institute for Economic and Social Research (NIESR) suggests that those with a mortgage to pay off, are paying less into their pensions and ultimately end up with less retirement income than those who don’t own a property. So with this in mind, should you ever sacrifice one to pay more into the other?
A challenging property market
The question of investing in property or pension has long existed and whichever side you sit on, with the current economic climate and a challenging property market, your priorities may have changed. Homeowners that are currently tackling the recent mortgage rate increases, are having to consider whether to up their payments. And for those who are yet to join the property ladder, the rising cost of living‘s impacting their ability to save for a decent house deposit.
Former CMO at Habito; Abba Newbery says: “For most people, the struggle is to get on the property ladder in the first place.”
Without a significant wage increase or bonus, you’re left to choose between reducing your spending each month, which can be very difficult during times of high inflation, or putting less money away for your future - whether that be in a savings account or a pension, in order to invest in property.
Unfortunately, as everyday prices rise so does the cost of retiring. In January 2023, the Pensions & Lifetime Savings Association (PLSA) updated their Retirement Living Standards. This report, first published in 2019, shows retirees what their lifestyle could look like at three different income levels, ranging from minimum to comfortable. And as of 2023, the cost of retiring has increased across the board with the amount you’d need to achieve a minimum standard of living rising by nearly 20%.
So, with the current cost of living and mortgage rates rising coupled with the need for an increased focus on saving for retirement, there’s much to consider.
Getting onto the property ladder vs. saving for retirement
Joining the property ladder
For some of the younger generation, there’s a real struggle to balance paying into your pension while saving up the large amount that’s needed these days for a house deposit. It’s easy to see how the desire to become a homeowner could outweigh the enthusiasm to start saving into a pension, especially if you’re a few decades off retirement. Property can be seen as something much more gratifying than a pension plus, as we know, pensions can seem complicated. People are scared of making the wrong choices when it comes to their pension whereas property has typically been seen as a ‘safer’ investment, thanks to house-price growth and lower borrowing costs.
Founder of The Financial Joy Academy and The Humble Penny; Ken Okoroafor says: “We need to get better at helping people visualise the benefits of their pensions.”
If you’re lucky enough to join the property ladder, there are of course several pros that come with this. Property’s tangible, you can see and experience it, and crucially you can enjoy it well ahead of your retirement years. Whereas you can’t touch your pension money until you reach retirement age. For example, if eligible, you can claim your State Pension from age 66 (rising to 67 from 2028) whereas you can withdraw from your personal, private or workplace pension from age 55 (rising to 57 from 2028).
Saving for retirement
While it may be less tangible than property, there’s a strong case for investing in your pension. For employed people who meet the minimum earnings and age requirements, Auto-Enrolment means that while you’re saving into a workplace pension, your employer’s obliged to contribute as well. There are minimum contribution rates of 8% too, this is broken down into:
Employees have to pay at least 5% of their annual ‘qualifying earnings’, which includes 1% tax relief from HMRC.
Employers have to pay at least 3% of an employee’s annual ‘qualifying earnings’ into their pension.
Most savers will usually benefit from tax relief on their personal contributions, plus when you reach retirement age, you’ll be able to withdraw 25% of your pension as a tax-free lump sum. There are also incentives when it comes to passing on your pension when you die. If you pass away before you’re 75, your beneficiaries can, in most circumstances, take your retirement savings tax-free. If you’re over 75, your beneficiaries will pay tax at the nominal rate. This is the case for defined contribution pensions, which most modern workplaces and personal pensions are.
VP Brand and Communications at PensionBee; Rachael Oku says: “Investment growth is one of the key aims of investing. But with pensions, that’s only really part of the story, there are lots of incentives.”
We mentioned earlier that you can’t touch your pension money before your mid-50s, in the same way that you’d be able to sell your property for the cash at any time, but there’s a benefit here. Pensions grow over time and benefit from compounding so, the longer you leave your savings invested, the more they’ll grow.
Are there any cons to using your property as your retirement fund?
While getting onto the property ladder is a great financial goal to have, it’s important not to overlook the practicalities of using your property for your retirement income. If you own multiple buy-to-let properties, you’ll have the option to sell them or continue generating income from letting them out. However, using your property to fund your retirement could also mean selling your dream home that you’ve worked for all your life. If you want to free up any or all of the money you’ve invested in your home, you’ll need to vacate it and downsize.
Additionally, if when coming up to retirement age, the property market dips, you could end up in the tough position of having to sell your property for less than it’s worth, just so you can access the cash.
Should you make mortgage payments at the expense of your pension?
Former CMO at Habito; Abba Newbery says: “I think the opportunity to use your house as leverage is important.”
You might be tempted to increase your mortgage payments to pay it off sooner. This can be tempting, especially at the expense of a long-term savings product such as your pension. It’s important to consider your goals - to some, paying off your mortgage sooner brings a sense of mental freedom, as well as reducing living costs.
But there’s also an argument for continuing with steady mortgage payments while also using your income to enjoy your desired lifestyle, and still putting some of your money away into savings - whether that’s for family holidays, into a pension or ISA, or towards an emergency fund. Paying off your mortgage over a longer period of time might also afford you the luxury of investing in and enjoying a larger house, or perhaps it means you can afford to live in a more expensive area that’s more suitable for your family and work life.
Key things to consider
Think about how long your retirement is going to be - you might be able to start taking some pension money out from 55, but you’ll potentially live until you’re 90+.
While things like inflation, mortgage rates and cost of living fluctuate over time, so does the cost of retiring and knowing how much you’ll need later will help you decide where to invest now.
If you’re a long way off retirement, you might need to consider at what age you’ll be able to claim your State Pension and, if there’ll even be an adequate State Pension in the decades to come that aligns with your retirement goals.
Keep in mind the practical cost of using your property as your retirement fund - it could mean vacating your family home and downsizing which you might not want to do.
Diversification’s key and, when saving for your future, is a much better option than putting all your eggs into one basket.
In episode four of The Pension Confident Podcast, Peter Komolafe’s joined by Founder of the Financial Joy Academy, and The Humble Penny; Ken Okoroafor, Former CMO at Habito; Abba Newbery and VP Brand and Communications at PensionBee; Rachael Oku - listen to the episode or read the transcript and hear their thoughts on property vs pensions.