Important information - The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

Bricks and mortar hold a special appeal for many people, and some even plan their retirement income around the returns available from property.

It’s not hard to see why when you look at the huge sums that some people have been able to make by riding the property market. But like any financial asset, investing in property - particularly if that is at the expense of other types of investments - carries risk, and changes in how property is taxed has meant that the big gains from rising house prices may be harder to replicate in the future.

If you are considering using property investments to fund your retirement - including by withdrawing pension cash to purchase a rental property - here’s a checklist of things to consider.


A perception has built up over many decades that residential property prices outpace other assets, such as shares, but the reality is much more complicated than that.

Returns from property can comprise both rents and any capital appreciation the property enjoys. Growing house prices have often produced a great return for landlords but this is not guaranteed - just as there’s no guarantee that the stock market will rise. When working out the rental yields you could expect from a property you need to bear in mind that any costs like maintenance, repairs, insurances, tax (see below) and other fees will detract from that.

And there is another factor which can give the impression of much higher returns from property. Many people buying investment property do so using a mortgage, meaning the asset they own is worth more than the money they have expended to buy it. They then have to maintain mortgage repayments but any growth in the capital value of their property amplifies the return they make on their money invested - a process known in investing as ‘gearing’.

That makes gains much larger when the value of the property rises but also, as we explain next, adds more risk.


At a headline level, the price of shares is more volatile than the price of residential property. Part of the reason for that is that houses are far less ‘liquid’ than shares - in other words it is harder and more time consuming to buy a house than it is to buy shares.

This itself creates a risk around property. Your ability to get your money back depends on your ability to sell the property when you need to.

Additionally, when buying a buy-to-let property your return is specific to that one property and not the property market in general. It depends on the property itself and the area it is located. If you suffer a problem with the property or the surrounding area becomes less desirable, your return will be affected. Either your house price will fall or the rent you can expect will decrease.

With shares it is easier to mitigate these specific risks by buying a stake in a whole range of companies in a diversified portfolio. Investors in shares are typically exposed to dozens - or even hundreds - of individual companies so failure at any one of them can be absorbed.

Finally, as previously mentioned, residential property which has been purchased using a mortgage exposes buyers to the risk that the value of the property falls below the value of the debt - known as negative equity. The debt still has to be repaid creating the risk that you lose more than you invested in the first place.


When comparing property investment to saving into a pension it is important to consider tax rules for money contributed and also money withdrawn.

Pension contributions benefit from tax relief. In summary, a £1 contribution into a pension today typically costs you 80p if you live in the UK and are a basic-rate taxpayer, as little as 60p if you’re a higher-rate taxpayer and 55p if you pay additional-rate tax. Exactly how it works will depend on the way your pension scheme operates its tax relief.

Once contributed, the investments in your pension are sheltered from Income and Capital Gains Tax, which can make a significant difference to the value of your pension pot over the years. From the age of 55 you normally have the option of taking up to 25% (or sometimes more) of your pension as a tax-free lump sum. You are free to spend or invest this as you like, though you cannot reinvest it into another pension scheme. The rest of your pension fund is then subject to income tax at your marginal rate.

This compares to property where the tax regime has been getting less generous. When buying a property you will need to pay Stamp Duty Land Tax - as well as other fees for conveyancing and surveys. There is an additional 3% Stamp Duty charge for residential property if it is in addition to your primary residence - this is on top of the normal Stamp Duty rates that apply for primary residences. Until March 2021 no Stamp Duty applies on residential purchases up to £500,000, but the 3% additional charge still applies for additional homes.

The income from buy-to-let needs to be declared as part of your Self-Assessment tax return. The tax on your income is then charged in accordance with your income tax banding - 20% for basic rate taxpayers, 40% for higher rate, and 45% for additional rate. There are some costs which can then be offset against your tax bill, but these may be limited and subject to tax rules. For example, as of April 2020, your mortgage interest can only be offset up to the value of basic rate tax relief.

When it comes time to sell your investment property there may be Capital Gains Tax to pay if the value has risen. Again, some costs of ownership are deductible from this tax bill. The CGT you pay is subject to the annual allowance for Capital Gains. In the 2020/21 tax year, this allowance is £12,300. If the gain is greater than the £12,300 allowance, you will pay tax at a rate of either 18% or 28% on any profit over £12,300, depending on the amount of income and capital gains you have.

Passing it on

There are significant differences in how pensions and property investments are treated when passing those assets on after death. We all have up to £325,000 that can be passed on with no Inheritance Tax due. This is known as the “nil-rate band”. Your estate can include any money held in cash or investments, property and other possessions.

Anything over the nil-rate band can potentially face 40% tax. Anything that is passed to a spouse or civil partner, however, attracts no IHT at all and there is a further exemption if the estate being passed includes a primary residence - a home in which you live. For 2020/21, this means an extra £175,000 of nil-rate band per person. But buy-to-let property will not count as a primary residence so will fall inside your estate for IHT purposes.

With pensions, if you die before the age of 75, anything in your defined contribution pensions can be passed on to anyone you wish and the recipient won’t have to pay tax on it, as long as this is done within two years of the date of death.

You can express to the company running the pension who you would like to benefit in case you die.

The money is not normally part of your estate, so no Inheritance Tax is due when it is paid out from the pension. Bear in mind that, if you have already started accessing your money, anything that you have withdrawn, including the potential 25% of it that is available to you tax-free, would fall inside your estate and therefore be liable for inheritance tax.

For funds still within the pension at death, beneficiaries can withdraw some or all of it, or take an income as if it were their own pension. They don’t have to be of pension age to get the money.

This assumes that you are within your own lifetime allowance for pension savings - currently £1,073,100 for most - when you die. If not, then a charge may apply before the money is passed on.

If death occurs after age 75, then the money withdrawn is liable to income tax at the recipient’s marginal rate.

In conclusion, if you’ve been planning on making wealth in property part of your retirement income plans, ensure you take stock of all the risks and potential downsides. You may find investing in financial markets like share or bonds an easier path.

Important information - Eligibility to invest in a pension and tax treatment depends on personal circumstances and all tax rules may change. You can't normally access money in a pension until 55. This information and our guidance tools are not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser. You should regularly reassess the suitability of your investments to ensure they continue to meet your attitude to risk and investment goals.

Topics Covered

SIPP, regular saving, saving for retirement, investment principles

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