Pensions may be safer than houses

Almost half the people (44per cent) in the study by the Office for National Statistics (ONS) believe property is the best way to make money for retirement. Workplace pensions trailed in second place at 25per cent.

However, workplace pensions are seen as the least risky way to save for your old age, according to 41per cent of respondents. Less than a third (28per cent) named property as the least safest option.

So are they right? The property market has certainly performed well over the past 10 years, but perhaps not as well as you might think. House prices in Scotland have risen by 27per cent, according to the Halifax house price index.

But pensions are way ahead. Many people invest their pension savings in a balanced managed fund, and the average is up by 60per cent over the last ten years. Returns from the stock market are also healthy: the FTSE All Share has surged by 86per cent, with dividends reinvested.

In other words, the statistics suggest that we are wrong to expect property to provide the most comfortable retirement.

Adrian Lowcock, head of investing at AXA Wealth, understands why so many people put their faith in bricks and mortar. He says: “Property prices have been rising since the late 1990s, so it has proved a successful investment. People are also familiar with property, because they often own their home.”

Pensions, on the other hand, are seen as confusing and complicated, as well as subject to frequent changes. David Cameron’s government, for example, has recently granted pensioners greater freedom over how they spend their retirement savings, but it has also cut pension allowances and has hinted that the higher rates of tax relief on pension contributions are under threat.

Low interest rates have added fuel to the property boom. The base rate has stood at a record low of just 0.5per cent since March 2009, which means landlords can borrow money cheaply. The average two-year fixed buy to let mortgage rate is now 3.26per cent, compared with 5.23per cent five years ago, according to Moneyfacts, the data provider.

But the future might not be so bright. Patrick Connolly of Chase de Vere, an independent financial adviser, says: “It should be remembered that property prices can fall as well as rise. Mortgage rates will also start to increase at some point, denting the returns for some investors.” The profitability of buy-to-let investments is further threatened by upcoming tax changes announced by George Osborne, the chancellor.

Tax relief is one of the big advantages of a pension – and you can receive up to 45per cent tax relief on your contributions. Let’s say you pay £8000 into a pension. The government tops up the contribution to £10,000. Higher and top rate taxpayers can then claim the additional tax through their self-assessment return. So, a £10,000 contribution to a pension could cost a 40per cent taxpayer as little as £6000, or £5500 if you pay tax at 45per cent.

If you join a workplace pension, you also benefit from the employer’s contribution. Your employer has to contribute at least 1per cent to the scheme, but many firms are more generous, with some paying in more than 10per cent.

Tom McPhail, head of retirement policy at Hargreaves Lansdown, a financial adviser, says: “The combination of employer contributions and tax relief means that many workers see the value of their savings double almost immediately.”

Investors should also think about diversification. A pension fund typically invests in a broad range of shares and other assets, such as bonds, to spread the risk. You can also usually exercise some choice. So you might pick a riskier fund when you are younger and move gradually into safer assets as you approach retirement age.

Property investment does not offer the same opportunities for diversification because all your investment eggs are in one basket. If you already own your home, the risk is further concentrated. Mr Lowcock says: “Many people are already exposed to the property market because they are homeowners – and the home is often the biggest asset. So you have to question whether it is wise to pour more money into property.”

Most people borrow to invest in a property, so you also have to think carefully about taking out another mortgage. The gearing can work in your favour because it can magnify your returns. But it can also magnify losses when times are tough.

Remember, too, that property is not always easy to sell. If something goes wrong, it could therefore take a long time to access your cash. Mr Connolly says: “It is difficult to get any real diversification if you invest in property, as most people can only afford to buy a small number of houses, so they are unable to spread risks. Property is also quite an illiquid asset meaning that you might not be able to sell quickly at the price you might want.”

However, don’t dismiss the importance of your property to your retirement portfolio. Mr McPhail says: “For many people now approaching retirement, their property is likely to make a significant contribution to their overall wealth in retirement and will be particularly relevant as a capital reserve for costs such as later-life care.”

The proportion of people who are not currently contributing to a pension because they are not working or earning a low income has jumped from 38per cent to 50per cent over the past few years. So in the end, whether you choose property or a pension, it’s better than nothing.