Life is full of catch-22s, especially when it comes to our finances.

For many of us, one of those tricky dilemmas is the amount of money we choose to invest in our future, whether that’s in a property or pension. Both options provide important financial stability but determining which one to prioritise can be challenging.

And although it may be hard to think beyond living in the moment and enjoying life right now, in times of financial crisis it’s especially important to take stock of how efficiently we’re saving for our future.

While many of us aspire to get on the property ladder or be mortgage-free as soon as possible, pensions are often viewed with a lot less confidence, certainty and excitement.

Did you know that 21% of Brits say that they have no private pensions and 17% of over-55s say that they have no pensions other than the State Pension.

That’s why PensionBee is on a mission to make pensions simple, so that everyone can enjoy a happy retirement.

So, if you’re struggling to decide whether to prioritise buying a property or building your pension, we’ve rounded up some of PensionBee’s key messages on the topic. Here’s everything you need to know…

This is a wise rule to live by in many areas of life but it’s particularly important where pensions are concerned.

A pension is a pot of savings specifically designed to support you in later life (aka, in retirement). Most people have workplace pensions (set up by their employers), but you can also set up a private pension by yourself.

Typically, both you and your employer pay money into your pension while you’re working. Your pension provider then invests that money into a range of stocks, shares and other assets that they expect to increase in value over time.

“It’s a good idea to start saving into a pension as soon as you can, even if you can only pay a small amount in to begin with,” advises Becky O’Connor, director of public affairs at PensionBee.

“When you start saving can make a big difference to how much your pot is worth at retirement and ideally, by the time you retire, your pension should be large enough to live off for several decades.”

In short, the sooner you start saving into a pension, the longer it’ll have to grow due to the power of compound returns.

If you’re enrolled in a workplace pension scheme, you can essentially receive ‘free money’ from your employer, thanks to ‘Auto-Enrolment’. 

If you’re eligible, employees pay at least 5% of their annual qualifying earnings into their workplace pension each month and employers must contribute at least 3% to the same pension. Some employers may even match the percentage you pay into your pension, so it’s worth checking if yours offers this.

“Making pension saving part of your long-term financial planning is particularly important given increasing life expectancies in the UK,” adds O’Connor.

“You might start accessing your pension from around 55, but you could live until you’re 90+. Most people are eligible for some level of support from the State Pension in retirement, but this alone is not usually enough to live off.” 

While the last couple of years have been difficult for homeowners due to market fluctuations – property, much like a pension, does tend to increase in value in the long-term.

“Property can be seen as a more tangible and immediate investment, and the prospect of paying off a mortgage offers financial freedom and reduced living expenses,” explains O’Connor.

An increase in your property’s value could also significantly increase your wealth over time. For example, a home bought for £84,600 in January 2000 would sell for an average of £233,000 in January 2020. That’s a rise of nearly £150,000 in just 20 years (averaging 5.1% growth per year). 

If you’re a homeowner, it’s a handy asset to have as you may be able to downsize to a smaller home and live off of the difference in retirement to supplement your income. You could also release equity from your property if you don’t wish to move (unlocking some of the tax-free funds from the value of your home) for a lump sum of cash, although this can come with hefty interest payments.

But while the benefits of owning a property may sound attractive, it doesn’t come without risk.

“Relying solely on property to fund your retirement can be precarious as it’s a very illiquid asset,” notes O’Connor.

This means it’s difficult to exchange for cash, and if the property market happens to dip as you approach retirement age, you could end up having to sell your property for less than it’s worth just to free up some cash.

“If possible, consider diversifying your investments by contributing to a pension alongside your property goals. Remember, you can live in a property but you can’t live off it,” advises O’Connor.

“This approach can help offer you a well-rounded retirement plan that combines the benefits of homeownership with the security of a pension fund.” 

Income tax. The dreaded culprit that reduces our take home pay by at least 20% every month.

You’ve probably heard that one of the best ways to feel like your money is working harder is to start investing because it can turn into a nice stream of passive income.

But did you know that one of the most tax-efficient forms of investment is through personal contributions made to a private or workplace pension, as they benefit from tax relief?

Most UK taxpayers get tax relief on their pension contributions which means the government effectively adds money to your pension pot. For example, when most basic rate taxpayers put £100 into their pension, the government tops this up by £25, making it £125.

You can receive tax relief on any personal pension contributions up to £60,000 or 100% of your salary (whichever is lower). This amount is known as the annual allowance and any contributions that you make over this limit are taxed at your highest rate.

A property can be a legacy for generations to come which may make prioritising a mortgage an attractive option. 

Whether your loved ones decide to keep the asset in the family or sell, it’s a great way to either help them get onto the property ladder or supplement their inheritance. However, if you fall behind on your mortgage payments you risk losing your home.

Although it’s not as well known, much like property, pensions can also be left to loved ones and can be a tax-efficient way of passing on your wealth. Pensions generally sit outside your taxable estate, so inheritance tax doesn’t usually apply.

And, while it may be a morbid thought, if you die before the age of 75 your beneficiaries will normally inherit your pension pot tax-free. 

However, you do need to make this arrangement with your pension provider in advance, by adding beneficiaries to your pension, to ensure your money ends up where you intend it to. 

Most pension funds are diversified, meaning that your money is invested in a range of assets (from property and company shares to bonds and cash) across global markets.

As with any investments you make there will always be fluctuations in value, and it’s no different with a pension. 

That’s why diversification is a great way to manage risk as it evens out any market changes, taking into account the fact that while markets in one part of the world may fall, others might go up. However, intermittent ups and downs don’t usually have a lasting impact as pensions are long-term saving products and so have plenty of time to recover.

“Regularly contributing to your pension is a good way to benefit from market volatility, as you’ll buy company shares at their lowest and highest prices over time,” explains O’Connor.

“In particular, if you are a young pension saver, these market downturns can help accelerate long-term pension savings by capitalising on lower asset prices and longer investment horizons.”

If sacrificing some of your salary for a time in your life that’s seemingly in the very distant future feels scary, try to remember that little and often is the best way to move forward.

Prioritising your pension fund alongside your property-owning goals will put you in the best position possible to retire comfortably when the time rolls around.

“It’s easy to see why the allure of home ownership often eclipses the appeal of pension savings, particularly if you are several decades from retirement,” says O’Connor.

“However, it’s crucial not to let your property aspirations overshadow your pension planning. Underestimating the cost of retirement could leave you with a retirement shortfall in later life and force you to reassess your ambitions for retirement.”

If you’re struggling to see how saving for your pension is feasible in the current climate, O’Connor advises against taking an ‘all-or-nothing’ approach and champions starting out small.

“Save whatever you can to begin with, as early as possible and aim for a balanced savings approach. By allocating your hard-earned money to various financial objectives, spanning different financial instruments such as property, pensions, ISAs, LISAs or emergency funds, you’re taking an important step in building up financial assets to support you throughout your lifetime.”

Want a deep dive into the pensions vs property debate? Click here to listen to PensionBee’s podcast episode on the topic.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice. 

PensionBee can help you combine your old pension pots into one online plan that lets you keep track of your balance, make flexible contributions, invest in line with your values and make withdrawals from the age of 55. For more information, visit PensionBee.

Learn how long your pension could last with the PensionBee calculator.

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