There is a reason Adrian Edmondson is pictured above, (sadly less so Rik Mayall). All will become clear below.
Have you ever read the money sections of the newspapers at the weekend, particularly The Times, or Mail on Sunday?
There are a few versions of, essentially the same interview, floating around, in which a celebrity is asked about their money history and lessons learned.
In it, they're always asked the question: "What's best for Retirement - Property or Pension?"
It's a fairly innocuous question on the face of it.
But really, it's not a great question, as you can hold a million and one different things in your pension. Of course, what the question really means is a pension holding typical pension funds. Usually stocks and shares, and perhaps some bonds in there, to reduce risk. Likewise, you can hold the types of funds held in pensions in other investments, like Stocks and Shares ISAs.
Anyway, I find these interviews fascinating, as the person being interviewed nearly always says property.
It can be for any number of reasons, but this one from just a week ago is illuminating, and at the same time, pretty damning of the financial services world.
That is from an interview with Adrian Edmondson, of Bottom fame, in the Times. It saddens me as a fan of his, that he views financials services in this way, and he won't be the only one.
Three reasons property can be preferred over pensions
This, I think gives us an insight into one of the main reasons why a lot of people prefer 'property' to what I would call 'investments', which in this context are pensions and investment funds.
1) A lack of trust in the financial services world.
2) Can be from a preference for investing in something you can see with your own eyes. You can see, touch, and in some cases, smell (for better or worse) a property.
As Adrian says "a house will still be a house after a financial crash", and investments are just numbers on a page. People, understandably, tend to have less of an emotional connection to the FTSE 100 over a house filled with many memories, or because it looks nice.
3) And probably most importantly, I would argue, is down to a lack of financial education. Not because pensions are necessarily difficult to understand. They aren't, but we're not taught proper financial education at school. Added to this we're a nation obsessed with property, as are our media, so you'd do well not to understand how property, as an investment, works.
Lack of Education
I put out a poll on this topic on this platform, and by far, respondents said pensions are 'better' than property. It was around 65%/35% in favour of pensions.
Yet, according to Pensions and Lifetime Savings Association, 69% of savers surveyed said they believe they lack, or are unsure of the skills they need, to choose where they should invest their pension¹.
This speaks to a worrying lack of understanding of what pensions (investments) do, and can do for us, as a nation. It's no wonder then, that when people have built savings, or received an inheritance, perhaps in their 30's and 40's, and think of planning for their long-term financial future, that they consider this conundrum - "Do I get a buy-to-let, or do I Invest in my ISA/Pension?"
So what performs better? Property vs. Pensions
Let's strip out the emotional factors, for a moment. You may have a natural preference for one or the other from personal experience, or remember what you were taught by parents growing up.
For now, let's just consider the cold, hard returns side of things. Most people who invest in either do so for a financial return, so that has to be the most important consideration at this point.
Schroders, the investment house, conducted research on returns of property in various parts of the UK, compared with investments in Global Equities, which are investments in stocks and shares around the world. Essentially, what most people have in their pensions.
They measured at the end of 2022, as to what £100,000 invested would have returned over the last 25 years².
As you can see, 'pensions' (investments) easily provided the best returns over the last 25 years compared with the growth in property prices, turning your £100,000 into £631,000.
Next best, was investing in property in London, turning your £100,000 into £580,000.
Other Considerations over and above returns alone
Of course, choosing to invest in property or investment funds, or anything else for that matter, is not just about how the underlying assets performs.
From my perspective as a financial planner, here are some of the most important other considerations.
Fees and Involvement
Rental income will increase returns from property compared with those shown above, this is true. But on the flip side, to obtain the property, you may have a mortgage, with added interest, which in turn reduces returns.
Some people like the idea of property as a 'passive income', but how passive is it really?
You'll have the hassle of 'managing' the property, be it admin, such as bills, or dealing with tenants and their needs. That doesn't sound that passive to me.
Otherwise, you get a property manager involved who can take anything up to 25% of your rent for their services, although it typically is less than this amount.
Pensions have management fees and this chart excludes those. These can typically be up to 1.5% a year, but with a workplace pension or personal pension could be much lower.
Because pensions are just numbers on a page, the only people you deal with are your pension provider or your financial planner, who looks after your investments/pensions for you. Because of this pensions (investment funds) are much more passive.
Access
Property you can 'access' (sell) at any time, as long as you have a willing buyer, but this depends a lot on the property market at the time.
Pensions, you can't touch until age 55, increasing to 57 in a few years' time. But other investments that work like pensions, and can hold the same funds in (such as global equities), you can access at any age.
Tax
The tax regimes for the two approaches are vastly different as well. That would require its own article, and let's face of it, not many people want to read that.
The current political environment has made it harder for property to generate returns after tax, like it did in the 90's and 2000's, and for most people it only really works well if you do it as a business, and not so much as a side-income.
In summary
If you simply want to go by which gives you a better return in the long-term, global equities has proven to do this, and Schroders found this was the case over any time period - 5, 10, 15, 20, 25 or 30 years. But, remember, past performance is no guide to future performance, etc. etc!
However, returns alone should not be the be-all and end-all in your thinking.
More important should be the other factors I've mentioned. Consider what is likely to suit your lifestyle, how passive, or involved, do you want that income to be, and what suits your current and anticipated future tax situation, as this will have a big bearing on the effectiveness of either approach.
Essentially, both can work very well in the right circumstances, but there are trade-offs, and neither approach is without them.
You either need to work out which trade-offs you're comfortable with yourself, or find a professional who can help you do this.
² If you want to read more, Schroders' data can be found here: https://www.schroders.com/en-gb/uk/individual/insights/what-174-years-of-data-tell-us-about-house-price-affordability-in-the-uk/
If you'd like to talk to us about your situation to see if Financial Planning can help, you can book in an initial consultation here: https://calendly.com/labfp/intromeeting
Otherwise, see you next time.
The information contained within this blog post should not be taken as financial advice, as it does not take account of personal circumstances, which would affect advice given. Should you wish to talk to us about personalised advice for you, we'd be happy to do so.