Retirement planning: pension vs property


What’s the best way to plan for your retirement? Is it really all about pensions… or could property play a role? Here are some important points to consider, which could help you to decide what’s right for you.

In our articles on investing in buy-to-let property, you’ll find information on how capital returns and rental yields could contribute to the profit which prospective landlords hope to gain from their properties. Before you make any decisions on whether this type of investment should play a role in your retirement planning, it’s important to consider alternatives – which, for most people will be pensions.

The return on investments held in a pension

Pensions can be invested in a very wide range of assets, and we have covered many of the possibilities in previous editions of Thinking Ahead.

The one major asset class that pensions can’t invest in directly is residential property.

Pension investors seeking out the best returns, whether they are saving for the future or taking lifetime income withdrawals, will usually invest in funds containing a high proportion of shares or equities. In comparison to residential property, how have equities performed?

Dividend yield

Like residential property equities make their returns and losses from two sources:

  • Dividend income

  • Any increase or decrease in the shares prices relative to the price paid.  

The following chart shows the dividend yield available for someone buying a portfolio of shares – or a tracker fund – that matched the shares and relative proportion of shares owned within the FTSE All Share Index. This covers the same period as our examples for residential property rental yields and capital returns, namely the 11-year period from February 2006 to February 2017:

 Source: FTSE

Remember that past performance is not a guide to the future.

Like residential property, there are regular ongoing costs of holding equity investments within a pension. The main ones are:

  • Fund management fees

For an index-tracking fund, these usually range from 0.05% to 0.1%, but are more expensive – typically 0.75% - if an actively managed fund is used. 

  • Pension administration fees

 These can be either £s fees, percentage fees or a combination of both. The cheapest percentage fees are around 0.4% a year.

So, investing your pension in a UK equity index tracker will attract minimum ongoing costs of around 0.5% (0.4% administration plus 0.1% for fund management) in total.

As you can see from the above graph, the typical gross dividend yield over the last 11 years has been around 3.5%, with a low of 2.7% in May 2007 and a high of 5.4% in February 2009. High yields are generally available when the price of shares is low and vice versa, so it makes good financial sense to buy shares after their price has fallen – as in 2008 or 2009.

However, net of costs, the typical dividend or income from owning a wide basket of UK shares (such as the FTSE All Share Index) in a pension has been about 3% a year, roughly the same net income that would have been received by owning a buy-to-let.

Capital return

The annual change in the capital value of the FTSE All Share Index is shown in the following graph:

Source: FTSE

The first thing that is immediately apparent is that the price of shares is more volatile than the price of residential properties. That is, when the price falls, it falls much further and faster than house prices and when it rises, it rises much further and much faster than house prices. For example, in the year to 1 March 2009, the capital value of the FTSE All Share Index fell by 38.5% and in the year to 1 March 2010, it rose by 50.9%.

Over the whole 11-year period shown above, the annualised capital return from investing in the shares of the FTSE All Share Index was 2.8%. Again, we need to remind you that past performance shouldn’t be taken as an indicator of what may occur in the future.

Like residential property, there are some buying and selling costs associated with owning shares such as stamp duty which is 0.5% and brokerage fees. However, spread over a long period, these fees reduce the annual return by less than 0.01%. You can read more about this on page 16 of Aviva’s annual report for members of our workplace pension schemes.

So how does this shape up?

We can conclude that the total return from investing in the shares of the FTSE All Share Index over the 11-year period analysed, net of all costs and charges, is about 5.8%.

This is very similar to the return that might have been achieved from investing in residential property. One reason for this similarity is that the value of ‘real’ assets such as equities and property is closely linked to the performance of the wider economy. However, other factors such as supply and demand also have a bearing on prices paid and the overall return.           

What about taxation?

Taxation strongly favours pensions over buy-to-let. One reason for this is that the government wants us all to save for our later years in order to reduce strain on public spending; the more we save, the less we will be reliant on state support.

Another more recent reason is the change to the tax rules for buy-to-lets that discourage potential investors and encourage existing investors to sell their residential portfolios. One aim of these changes is to increase the stock of housing available to buy, therefore allowing more people to become home owners. Other government policies, such as the Lifetime ISA, aimed at people saving for their first home, also support this objective.   

The following table compares the main features of taxation that apply to pensions and buy-to-lets:

Tax feature



Tax relief given on purchase price?

Yes, at the saver’s highest marginal rate of up to 45%


Investment grows free of capital gains tax?


No, capital gains tax is payable if a chargeable gain arises when the property is sold (disposal). 

Is investment growth tax-free?

Yes, regular income from investments is received into a pension fund without deduction of tax. There is no tax on capital gains made by investments within a pension.

No, although expenses can be deducted, including some mortgage interest, when calculating the tax payable. Capital gains tax may be payable when the property is sold or ownership transferred.

Outside of estate for inheritance tax purposes?



Proportion of investment tax-free?

Yes, 25% of accumulated savings can be taken as a tax-free lump sum.

No, although capital gains tax allowance can be used to reduce any taxable gains.

Stamp duty

Yes, payable when assets that attract stamp duty are purchased by a pension fund 

Yes, plus an additional 3% for buy-to-let residential properties

Tax when withdrawing savings

Yes, 75% of the proceeds are taxable at the saver’s highest marginal rate

Capital gains tax is payable when the property is disposed of although an

annual capital gains exemption of £11,300 is available to reduce the taxable gain. If the property is jointly owned, each of the joint owners can use this exemption.

Limit on how much you can invest?

Yes, the amount that can be saved tax-efficiently each year is £40,000, although carry- forward rules allow higher amounts to be paid if allowance under-utilised in the previous three tax years


Limit on overall value?

Yes, a £1m lifetime allowance applies to lifetime pension savings, above which penal tax charges are levied 

No, although stamp duty of up to 15% discourages purchase of larger properties 

Restrictions on when you can access savings/investments?

Yes, access not generally available until age 55

No, although residential property may not be as readily realisable as most pension investments


Apart from the April 2016 increase in stamp duty rates for buy-to-lets, the most recent tax change for buy-to-let owners applies to the rate of tax relief available on mortgage interest. From April 2017, only 75% of mortgage finance costs can be claimed as an expense, falling to 50% in 2018/19, 25% in 2019/20 and 0% in 2020/21. However, a 20% tax credit will replace the current deduction rules, meaning that higher and additional rate taxpayers will effectively get mortgage interest tax relief at the basic rate of income tax.


Analysis of income and capital growth from residential property investments suggests that houses can produce attractive long-term returns. However, investment in residential property carries large tax disadvantages. Unlike pensions, buy-to-lets do not suffer from limitations on how much you can invest and when you can access your investments.

But for people whose primary goal is to save for retirement, and feel comfortable with the fact that funds cannot be accessed until age 55, a pension remains the most popular choice. Achieving good returns on pension investments is, of course, the key to a successful outcome. 


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