Property or pension — which is best?
🔸 Plus: The sad decline of the London Stock Exchange 🔸 A simple formula shows you how much money you need for retirement 🔸 Slouching in your chair at work has zero negative health benefits 🔸
Your 2-minute guide to demystifying money and making you richer
The markets, year-to-date
S&P 500: 5,459.10 ⬆️ 15.10%
FTSE 100: 8,285.71 ⬆️ 7.31%
Bitcoin: $568,708.20 ⬆️ 55.43%
GBP to USD: $1.2879 ⬆️ 1.20%
GBP to EUR: €1.1860 ⬆️ 2.85%
As of market close on Friday
Property or pension?
Every week, The Sunday Times’ “Fame and Fortune” column interviews a celebrity (or often a person who, ahem, used to be a celebrity) about their personal finances. The conceit of the column is that we might learn about saving and investing from someone who came second on Dancing on Ice.
Celebrities, of course, are not financial experts. Often they are the opposite. The Bay City Rollers, for instance, were probably the most successful band in Britain in the 1970s — but by 1979 they were bankrupt.
And the column is self-selecting: No celeb is going to admit that after the screaming stopped they ended up on Universal Credit.
The column usually asks the star whether they prefer property or pension for investing. Almost without fail the stars of yesteryear insist that buying a house is the best way.
There are a couple of reasons for this:
They bought their houses decades ago when property was a lot cheaper, and enjoyed the gains from that. Clare Grogan of Altered Images bought a flat in Crouch End for £64,000 in the 90s! Today, the average price of a house or flat in her neighbourhood is ten times that.
Rock stars and actors often enjoy drugs, and sensible talent managers urge their clients to buy property because it prevents them from sniffing all their cash up their noses.
So, are the celebrities right? Is property better than a pension if you are investing for retirement?
The answer is complex so we have broken it down into pros and cons for each (below). But first, in terms of pure gains, the following charts show annual returns for the UK housing market vs the S&P 500 index of major company stocks:
S&P 500 annual returns since 2003
Both have been volatile but house prices have never gained more than 14% in a single year, while stocks exceed that frequently. So in terms of pure financial gain, stocks return more in the long run.
Property pros
It’s yours! You get to live in it!
If you need extra cash, you can rent out rooms or the whole thing. Or put it on Airbnb.
Your monthly mortgage payment is fixed, and can be periodically renegotiated with the bank. So you control your monthly costs — unlike rent where you’re at the mercy of your landlord.
Property is highly likely to grow in value in the long run. They are not making any more land.
Even if the value sinks, if you have paid off enough equity you should still be able to sell and walk away with a large chunk of cash — you can never do that while renting.
Equity: Once you’ve paid off part of your mortgage you have “equity” in the house — you own a part of it outright. And, if you need to, you can remortgage that equity for more cash.
You can sell up at any time.
Property cons
It might take you a long time to save for a deposit, and this will reduce your gains because the less time you’re invested the lower your gains will be.
You’re paying interest the whole time. If a house costs £300,000 and your mortgage carries an interest rate of 4.5% over 30 years, then the total amount of cash you will repay over that period will be £546,977.
You’ll have repair and maintenance expenses.
It’s difficult to know the true sale value of your house at any point in time.
Your house might go “under water” — become less valuable than the mortgage you owe on it.
Selling a home is a months-long process.
Investing your “pension” in a single house is putting all your eggs in one basket.
You will have to pay tax (stamp duty) when you sell the house.
If your home is in the “wrong” neighborhood it may not go up in value enough.
If your home is your retirement plan you’ll have to sell it when you retire — so you’ll need to move somewhere cheaper to get the advantage.
Ask any landlord: While the dream of having passive income from tenants sounds lovely the reality is often different: Strangers can damage your house, stop paying rent, or refuse to move out.
Pension pros
You can start investing immediately.
Easy to buy into. You can buy mutual funds with as little as £100.
You will start to see growth almost immediately. S&P 500 stocks generally grow at about 6-10% per year.
Some stocks pay dividends along the way — that’s free cash.
Easy to sell — you can generally get your cash out within minutes. Some pensions may take a few weeks to unwind.
Tax benefits: The government does not tax any of your income that you put into a pension plan.
Employer cash match: if you’re contributing to a workplace pension, your employer is legally required to match at least 3% of your salary — that’s free cash.
Your pension investments are likely to be diversified across dozens of stocks, reducing your risk. Your eggs are not all in the same basket.
You can turn a pension into an annuity when you retire: this is the process of selling your pension savings to an insurance company that will in exchange give you a guaranteed cash income for life. You can’t do that with a house.
Pension cons
Markets go through declines. Serious market corrections can cut the value of your investment by 20% or more, temporarily. You’ll have to tolerate that volatility.
It can be difficult to time your exit.
Learning enough about stocks to become comfortable with the idea of investing is time-consuming. (Although passively investing in the entire market should take the edge off this.)
Mutual funds often charge fees that can eat into your gains over time.
If you’re only investing in a pension and renting, then you are at the mercy of your landlord in terms of monthly living costs.
Your money is generally locked into your pension until you are at least 55 years old.
Sadly, there is no “answer” to this question. It depends on your individual needs and ambitions, and especially your time horizon. Ideally, you should do both if you can.
If you’re strapped for cash then using your workplace pension (or a SIPP if you’re self-employed) is your best bet in the near term — it will give you the most gains for the least amount of money.
Alternatively, one route that will get you the advantage of both stocks and property is to utilise a Lifetime ISA, which will allow you to save money, receive a 25% cash match from the government, invest in stocks, and cash out tax-free if you are buying a house.
And for dessert …
A deep dive on the sad decline of the London Stock Exchange by Simon Nixon.
How much money do you need for retirement? Twenty-five times your annual expenses, according to this formula.
“I borrowed £3,000 from a loan shark and will end up paying back £8,400.” Do not do this.
Slouching in your chair at work has pretty much zero negative health benefits. Slouch away, comrades!
No one can figure out how to turn the lights on or off in hotel rooms. The Wall Street Journal investigates why light switches got so complicated.
The Moneyin2 Guide to Wealth
The Moneyin2 Guide to Wealth will get you the biggest return on your savings by maximising cash matches from your employer, free cash from the government, and shielding your investment gains from tax. It takes you step-by-step through the world of pensions, SIPPs, ISAs and ETFs — all in plain English.
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