Originally published at: https://blog.investengine.com/property-vs-pension-which-is-the-better-long-term-investment/
Compare investing in property vs pension, to help you understand which is the smarter way to grow your wealth for retirement.
We’ll break down the pros and cons of both, discussing costs, tax, risk and flexibility.
Why should you save for retirement?
Planning for retirement means making smarter decisions today, so your future self can benefit from better financial security. In your older years, your invested money will be working hard for you. You can travel, buy what you want and relax without worrying too much about your budget.
Some people choose to build wealth by buying a house, which means you’ll own a physical asset. Others prefer to contribute to their pension in order to enjoy certain tax advantages and can be simpler to understand.
Many opt for both. However, these options differ when it comes to cost, return potential, tax planning and lifestyle suitability.
In this blog, we’ll be comparing putting your money into buy‑to‑let properties vs self-invested personal pensions to help you decide which pathway makes more sense for your goals.
Property vs pension return comparison
| Feature | Buy-to-let property | Pension (SIPP) |
|---|---|---|
| Upfront cost | High (deposit, stamp duty, fees) | Low (start with £100 on InvestEngine) |
| Ongoing expenses | Mortgage, repairs, managements | Low (ETF costs apply, but no platform fees with an InvestEngine SIPP) |
| Tax treatment | Income tax and capital gains tax apply | Get tax relief from the government, and pay no capital gains tax on investments inside a SIPP (withdraw the first 25% lump sum tax-free, but be aware that the remaining 75% may be subject to income tax) |
| Diversification | Poor (with one or two properties) | High (access global ETFs across asset classes) |
| Flexibility | Can sell a property at any age but can take months or years to sell | Locked until 55 (or 57 in 2028) |
| Hassle factor | High (tenants, upkeep) | Low (automated payments and digital management) |
| Leverage | Yes (mortgage) | No |
| Long-term return potential | Capital growth and rental income, dependent on location and market | Returns benefitting from compounding effect |
How do pensions work and what are their benefits?
A pension is a way to save for retirement that has specific tax benefits. Most people can expect to access the state pension as well as any workplace pension they have. It is, however, also important to consider the benefits of a SIPP.
A self invested personal pension (SIPP) is a type of private pension that lets you choose and manage your investments, including low-cost ETFs.
With InvestEngine, you can start a SIPP with just £100. You can use a DIY portfolio to pick your own indexes, sectors and regions to invest in.
Tax relief
One major benefit of a SIPP is the tax relief. If you are a basic-rate tax payer, the government will automatically give you 20% in tax relief when you add money to your pension.
So, if you wanted to put £100 into your SIPP, you’d only need to contribute £80 (the government adds the additional £20). This is particularly beneficial for higher rate tax payers.
You can also claim additional tax relief on your Self Assessment tax return for money you put into a private pension:
- If you earn between £50,271 and £125,140, you may be able to claim an extra 20% tax relief on the portion of your income taxed at the higher rate (40%).
- If you earn over £125,140, you may be eligible for up to 25% additional tax relief on income taxed at the additional rate (45%).
Compound interest
Compounding growth (gains that are reinvested) is your superpower to use over the long-term. Gains are reinvested tax-efficiently, helping the value of your pension pot to snowball over time.
Over decades, even small annual returns can grow substantially. What’s more, all investment growth within a SIPP won’t be subject to income tax and capital gains tax.
Global diversification
SIPPs allow you to spread your money across global equities, bonds, commodities and assets. By accessing global diversification, you reduce your risk and exposure to volatile market events in one region.
Tax-free part withdrawal
When the time comes to withdrawing your pension, you can take a lump sum of 25% tax free. This can depend on your personal tax treatment, so we would recommend you consult with a financial advisor before you take this step.
Why choose an InvestEngine SIPP?
Expect hands-off and easier management. You won’t have to deal with tenants, repairs or any landlord admin.
Investing in a SIPP is transparent. You’ll benefit from low fees: no platform fees by investing in DIY InvestEngine SIPP and ETFs have a low total expense ratio (TER). TER is essentially management, administrative fees and other operating expenses. Therefore, you’ll have access to low-cost, globally diversified ETF portfolios.
With InvestEngine’s Savings Plans, you can fully automate your top ups and set your investments so that you don’t need to check on it too much.
Depending on how much risk you’re willing to take and how many years you have until retirement, you can fully customise your DIY portfolio to pick and choose which ETFs you’d like to invest in.
In order to support your learning, we’ve produced useful tools like calculators and guides. Read up on educational guides on our Insights blog written by our investment experts. Watch videos featuring experts in ETFs and financial planning to help demystify any confusing concepts.
Our app offers a seamless digital experience with added reporting and tax-year insights. Check out our pension pot calculator which will show you how much you will save on fees, how much tax you can reclaim, and what your SIPP pot could look like.
Pension considerations: what do you need to know?
Your access to your pension investments are restricted. Funds are locked until you’re 55 (rising to 57 in 2028), so it’s important to have other savings sources if you plan for early retirement.
There are contribution allowances and limits. You can invest up to £60,000 or 100% of your earnings (whichever is lowest) each tax year. Don’t forget to take advantage of carrying forward any unused allowances from the previous three tax years.
Watch out for lifetime allowance limits for high earners and check the latest HMRC rules. Remember that after you have withdrawn your initial 25% lump sum, you may have to pay tax on the remaining 75% depending on your personal circumstances.
What makes property investing appealing?
A house is a tangible asset and, for most people, a brick and mortar home can feel easier to understand and safer to invest in than abstract financial markets. Getting on the property ladder is an achievement, plus after fully paying off your mortgage, you’ll have a forever home to live in during retirement.
Investing in a buy‑to‑let property can deliver both rental income and capital appreciation over time. Capital appreciation is the increase of the value of an investment (in this case, a house) over time.
In the current housing climate, rents are high and interest rates are coming back down, so as a landlord you may enjoy positive net income each month.
Mortgages also enable you to control an expensive asset with a comparatively small deposit. You’ll be better protected against inflation as both rent and house prices tend to rise with inflation over the long term. Plus, getting rental income may feel like a safer source of income when investing markets are volatile.
What are the risks of property investing?
Buying a house can require a steep upfront cost. You’ll need to save up for initial expenses including a deposit which can be 15% to 25% of the property’s value. According to data from the UK House Price Index, the average price of a house in January 2025 was £269,000 – much more expensive in areas like London.
You’ll need to pay for stamp duty which is an unavoidable tax cost and can have multipliers applied, especially on buy‑to‑let properties. There are legal fees including conveyancing, title searches and admin which apply. Depending on the type of property, you may also need to budget for refurbishments to make the house liveable and appealing to potential tenants.
If you are buying the property to live in yourself, you won’t be able to benefit from rental income that could cover those costs. These steep upfront costs can total tens of thousands of pounds, money that could alternatively be spread across a well diversified investment portfolio consisting of shares, bonds and commodities.
You can expect ongoing costs and complexities as a landlord, including mortgage repayments, insurance, maintenance, unexpected loss of rental income, letting agency fees and compliance with safety regulations. As a result, your returns are diminished and require extra time management.
Rental income is taxed and can be between 20% to 45%. Stamp duty and the restrictions of mortgage interest relief could reduce your returns. When selling, capital gains tax applies on the profit you make from the sale.
Most investors can afford just one or two homes, therefore your total investment portfolio is less diversified, with a heavy concentration into the property market. This risk means any economic downturns, tenant loss or property damage can impact your expected returns. Property can also take months or years to sell if you are waiting for a good price.
How can you combine your pension and property investing effectively?
Pensions offer some clear advantages but property can still feature in a well‑rounded plan. While we can’t tell you how much to put into your pension or where you should buy a house, here’s how a well diversified wealth portfolio can help you achieve your ideal retirement lifestyle:
- Start with a SIPP:
- Make the most of free government contributions
- Invest in a globally diversified portfolio through ETFs
- Automate your savings with InvestEngine’s Savings Plans
- Add an ISA for flexibility
- Stocks and shares ISAs allow tax‑free growth
- Unlike pensions, you can access ISA funds anytime
- InvestEngine’s flexible ISA lets you withdraw and replace money in the same tax year without losing allowance
- Handy for short and medium‑term goals, home deposits or rainy day funds
- Consider property as a tactical play
- If you want a tangible asset or plan to mix capital growth and income, carefully research the market
- Factor in all costs and taxes
- Use mortgage leverage sensibly (you don’t want to overcommit making mortgage payments that are outside of your earning capacity)
- Make it part of a broader, diversified plan rather than the first step
Conclusion: making the smart choice
Property offers a sense of control, potential leverage and the allure of rental income. But you’ll have to factor in high upfront costs, management headaches, tax complexity and concentrated risk.
An InvestEngine SIPP will offer you greater tax efficiency, effortless diversification, lower hassle and potentially better alignment with retirement‑focused goals
You can also blend both, using a private pension to build a long‑term foundation of wealth (and S&S ISAs for flexibility). With this strong foundation, owning a property can be a small slice of a balanced plan.
FAQs
- Is a pension better than property for retirement? That depends on your goals. Pensions offer tax relief, long-term growth, and global diversification with minimal hassle. Property may provide rental income and the potential for capital growth but comes with higher upfront costs, taxes, and responsibilities. Many people benefit from a mix of both.
- Can I invest in both a pension and property? Yes. You can build a pension for long-term retirement planning while also investing in property if you have the spare cash and appetite for managing it. Combining a SIPP, ISA, and buy-to-let property can provide a more balanced investment strategy.
- What is a SIPP and how does it work? A SIPP (Self-Invested Personal Pension) lets you choose your own investments for retirement. With InvestEngine, you can build a globally diversified portfolio of low-cost ETFs, starting from just £100, and benefit from government tax relief on your contributions.
- What are the tax benefits of pensions? You get tax relief on contributions, and pay no tax on gains inside the pension. You can take 25% tax-free from age 55 (or age 57 from 2028).
- Is investing in a pension risky? All investing carries risk, including pensions. But spreading your money across different markets and asset types can reduce that risk. With ETFs and a DIY portfolio, you can minimise risk by building a portfolio that’s your appetite for risk as well as being well diversified.
- When can I access my pension? You can access your pension from age 55 (rising to 57 in 2028). At that point, you can usually take 25% as a tax-free lump sum, with the rest taxed as income.
- What’s the minimum to get started with an InvestEngine SIPP? You can start investing with InvestEngine from just £100 in a SIPP or ISA. Our Savings Plans allow you to automate regular contributions from as little as £10 per week.
Important information
Capital at risk. The value of your portfolio with InvestEngine can go down as well as up and you may get back less than you invest. ETF costs also apply.
This communication is provided for general information only and should not be construed as advice. If in doubt you may wish to consult a professional adviser for guidance.
Tax treatment depends on personal circumstances and is subject to change, and past performance is not a reliable indicator of future returns.