Pension or buy-to-let property, which is best for retirement planning?

Pension or buy to let?
Pension or buy to let?

In this article

  • Overview
  • Key points
  • Advantages and disadvantages of buy to let and pensions
  • Investment
  • Contributions
  • Taxation
  • On death
  • Misc
  • Costs
  • Recent changes
  • Case Study: buy-to-let property versus pension
  • Conclusion


Buy to let property, as well as pensions, continue to be popular investment vehicles for retirement planning. We look at the advantages and disadvantages of each.

Key points

  • Property is often considered to be a better investment than pensions but when the numbers are crunched this is often not the case.

  • Recent changes to how property is dealt with mean that there are more costs than there previously were in relation to buy-to-let.

  • Investment, taxation, maximum contributions, the way in which the asset is dealt with on death and a few other issues need to be considered when weighing up the best solution for the client.

Advantages and disadvantages of buy to let and pensions

Pensions and the purchase of buy-to-let property continue to be popular investment vehicles for retirement planning resulting in the age old discussion – ‘should I invest in property or a pension?’ Pension flexibilities have also resulted in many people considering withdrawing their pension to fund alternative investments, such as the purchase of buy-to-let (BTL) property. In this article we compare and contrast the advantages and disadvantages of each. 

The basics are straightforward:


  • Pensions are a tax-wrapper in which various asset classes can be easily purchased, held, switched and sold (usually without delay) as the client’s need/situation changes or in response to economic movement.

  • Buy-to-let property is a directly held single asset class which usually requires to be sold if any reshaping of the investment is required, selling requires finding a purchaser (or paying someone to find a purchaser) who is prepared to pay the required price at the required time.

  • Pensions provide the opportunity of diversifying the investment over various assets classes/geographical locations etc.

  • Few buy-to-let investors can afford to achieve sufficient diversification within the single asset class, never mind sufficient overall diversification.


  • Individual contributions to a pension receive tax relief at the marginal rate of the investor (albeit within contribution limits, Annual Allowance and if applicable Money Purchase Annual Allowance and Tapered Annual Allowance).

  • The purchase of buy-to-let property does not receive tax relief on the initial investment, deposits to buy property are paid from taxed income and the tax paid is not reclaimable.

  • Pension contributions can be used to manage the Child Benefit and Personal Allowance ‘tax traps’ – management of these traps can result in pension contributions benefiting from an even higher effective rate of tax relief than the rate of tax payable.

  • Buy-to-let investment cannot be used to manage tax traps.


  • Investment returns within a pension fund are free of income tax.

  • The rent received from a buy-to-let is taxable at the investor’s marginal rate, and although it was possible for landlords to fully deduct mortgage interest costs from property income this has been subject to changes with effect from the 2017/18 tax year. For full details see ‘Recent changes’ section below.

  • Investment returns within a pension fund are free of Capital Gains Tax (CGT).

  • On the sale of a buy-to-let property the profit is usually liable to CGT (assuming Private Letting Relief is not applicable), although purchase and sale costs are deductible. Although the rate of CGT charged on most gains (above the annual exemption) has been reduced from 28% to 20% for higher rate taxpayers and 18% to 10% for basic rate taxpayers, the 28% and 18% rates will continue to apply for gains accruing on the disposal of interests in residential properties that do not qualify for Private Residence Relief. The reason given by the government at the time of the change for retaining the higher CGT rates on property was to ‘provide an incentive for individuals to invest in companies over property’, in other words to dis-incentivise investment in property. It’s also difficult to segment the sale of a property, so managing a CGT liability (for example by spreading the profit over a number of tax years) is difficult. 

On death

  • Pension funds (Defined Contribution schemes) can be cascaded through generations usually free of Inheritance Tax. (subject to the scheme rules allowing this)

  • Buy-to-let properties are liable to IHT as part of the deceased’s (and any subsequent owner’s) estate.

  • Pension funds are usually accessible tax free by the beneficiary, on the death of the pension holder prior to age 75, and at the marginal rate of the beneficiary on death after age 75 (different tax rules apply to death benefits paid into trusts on death after age 75).
  • Income from inherited buy-to-let properties is liable to income tax irrespective of the date of death.


  • Pensions do not have ‘void’ periods (void period are periods where a rental property is without a rent paying tenant). Although pensions allowed to hold commercial property could be susceptible to this.

  • There is no guarantee that the property will always have tenants, even short ‘void’ periods would have a significant impact on the return. If using rental income as income in retirement void periods will have a significant effect.

The pension provider will not contact the pension holder on a Saturday evening to advise that the boiler has broken down.


  • Apart from the standard plan charges, which are clearly declared in the policy terms and conditions, pension investments do not usually incur any further costs. Property on the other hand will incur additional costs, including:

Costs on Purchase

  • Legal fees and costs, typically £750 to £2,000 (including local searches etc.)

  • Possibly Stamp Duty Land Tax (SDLT) on purchase, dependant on value of property (see below for recent increases in SDLT for buy-to-let properties). Land and Buildings Transaction Tax (LBTT) replaced UK Stamp Duty Land Tax (SDLT) in Scotland from 1 April 2015.

  • Landlords Licence may be required by some councils (not just House of Multiple Occupation (HMOs)). Application costs vary from council to council but can run into ‘hundreds of pounds’, however, failure to obtain a licence can result in fines of ‘tens of thousands’ of pounds.

  • The mid level of solicitors fees quoted above and adding in stamp duty for a £200,000 house (£6,000) would be the equivalent of a 3.69% initial charge in the pension’s world.

Ongoing costs

  • Letting agent fees – unless the investor wishes to get involved with the advertising, interviewing, referencing and monitoring of tenants/inventory and the collection of rent. These can be charged at a flat rate or a percentage of the rent. Expect to pay between 10-15% as standard with additional costs as applicable.

  • Possible debt and eviction litigation costs. The cost of litigation to remove a tenant can be high. One specialist in this area quotes £120 for an eviction notice, £950 for court fees, £250 for county court Bailiff, £860 for High Court Enforcement Officer. The chances of recovering these costs as well as any outstanding rent arrears (and costs incurred in rent arrear recovery) are questionable.

  • Wear and tear, maintenance/refurbishment costs, (see below). Many people renting may not treat the property as you would like and recovery of cost of damage (above the nominal deposit) may require further litigation. Older properties and flats above ground level in particular can be expensive to repair. Insurance may cover the cost of some types of damage to property. Cost- property dependant.

  • Cost of Energy Performance Certificate – landlords must have a valid certificate before any views are taken. It is valid for 10 years but can be reviewed if energy efficiency improvements have been made. Cost estimate £60-£120.

  • Gas Safety Certificate – all gas fittings must be checked annually by a Gas Safe registered engineer. Cost estimate £75 per annum.

  • Electrical safety checks – Portable Appliance Testing (PAT) of any installations in the property for the supply of electricity, electrical fixtures and fittings, any appliances provided by the landlord – cost estimate £35-£80 for testing of appliances, £100-£200 for consumer unit testing. Smoke and carbon monoxide alarms must also be fitted and maintained (mains powered) – variable cost.

  • Landlord emergency repair service may be required to reduce the stress of late night boiler failure (and other emergencies) – cost £12- £25 per month (but may include required safety certificates).

  • Landlords insurance – variable cost dependant on property.

Whilst most of these may be deductible from any profit made, a pension with such high annual fees (letting agent fees of 10% etc.) would be frowned upon by customer and regulator alike.

Costs on sale

  • Estate agency fees – cost can be anywhere between 0.75% and 3.5% plus VAT – dependant on type of contract and services provided (viewings etc.)

  • Legal fees, typically between £500 and £1500.

  • Given the cap on exit fees for the over 55’s, would a pension provider be able to charge this amount?

Changes to Stamp Duty

There have been a number of recent and ongoing legislative changes in the BTL arena, none of which appear to add any weight to the perceived ‘buy-to-let’ side, including:

  • From April 2016, buy-to-let properties have incurred an additional 3% Stamp Duty Land Tax (SDLT), as detailed above.

  • Tax relief on buy-to-let mortgage interest payments was reduced from April 2017 was fully implemented by 2020. Landlords are no longer able to deduct all of their finance interest costs from their property income to arrive at property profits. They will instead receive a basic rate reduction from their income tax liability for finance costs. Landlords will be able to obtain relief as follows:
  • 2017-18 75% finance costs deduction and 25% given as a basic rate tax reduction.

    • 2018-19 50% finance costs deduction and 50% given as a basic rate tax reduction.

    • 2019-20 25% finance costs deduction and 75% given as a basic rate tax reduction.

    • 2020-21 all financing costs incurred by a landlord will be given as a basic rate tax reduction.

  • Changes to the 10% ‘wear and tear’ allowance. From April 2016 this allowance was replaced with a new system that enables all landlords of residential property to deduct only those costs actually incurred. 

With effect from 6 April 2017, there are two new annual tax allowances for individuals of £1,000 each, one for trading and one for property income. The trading allowance will also apply to certain miscellaneous income from providing assets or services.

Where the allowances cover all of an individual’s relevant income (before expenses) then they will no longer have to declare or pay tax on this income.

Those with higher amounts of income will have the choice, when calculating their taxable profits, of deducting the allowance from their receipts, instead of deducting the actual allowable expenses. The trading allowance will also apply for Class 4 National Insurance contribution purposes.

The new allowances will not apply to partnership income from carrying on a trade, profession or property business in partnership.

The allowances will not apply in addition to relief given under the Rent-a-Room Scheme legislation.

The budget on 29 October 2018 introduced a change to Private Residence Relief that commenced from April 2020. The final period of ownership that is exempt from CGT is to reduce from 18 to 9 months. This represents a further reduction as until 2014 this was a period of the final 36 months.

Additionally from April 2020 lettings relief is only available if the owner and the tenant are in shared accommodation.

Case Study: buy-to-let property versus pension

So is investing in property instead of a pension, or even ‘cashing out’ your pension and buying residential buy-to-let properties a good idea? Let’s have a look at Richard.

Richard has accumulated a pension pot of £300,000.Walking past his local estate agent he takes a shine to a property in the window. He thinks buying this property and renting it out might provide better returns than leaving the money within his pension, so he calls his pension provider and cashes in his whole pension pot to buy the property.

He already has earnings of £30,000 pa; therefore the pension withdrawal will result in a loss of Richard’s Personal Allowance and an additional tax bill of £97,467 (tax bill of £100,953 with pension withdrawal, compared to £3,486 without). In reality, because the withdrawal is likely to be subject to Emergency Month 1 tax (common referred to as emergency tax) the initial tax bill is likely to be £99,628, although he will be able to claim any tax ‘overpayment’ back from HMRC. Please note that the above calculations have being completed using UK tax rates and tax bands, if Richard was a Scottish taxpayer the figures would be slightly different due to the introduction of the Scottish Rate of Income Tax .

If we assume he has additional funds to address the initial cash flow issue caused by emergency tax, there would be £202,533 of his pension fund left to purchase the property.

Out of this amount a number of costs need to be taken into account. These may include (based on a £200,000 property):

  • £6,000 Stamp Duty Land Tax
  • £1,375 solicitor/survey fees (estimated)

  • £2,000 White goods/Furniture costs (assuming renting out property as furnished, part furnished. However, even unfurnished properties usually provide certain white goods such as cooker, washing machines etc. Unfurnished properties without these basic amenities can be difficult to let).

So with estimated costs of £9,375, it leaves Richard with £193,158 to buy the property – unfortunately not enough for the £200,000 property he had in mind, so despite starting off with £300,000 in his pension fund he now needs to find £6,842 from other sources to fund the purchase.

Richard has elected to rent out his property via a letting agent, as he doesn’t want the hassle of advertising the property, interviewing/vetting potential tenants, arranging tenancy agreements, collecting rent, completing inspections etc. The agents selected charge 15% of the gross rental income for the services they provide, but they have managed to find a tenant prepared to rent the property for £1,000 per month, the tenant also takes care of the property so he incurs no costs in replacing damaged fixtures and fittings, so Richard is delighted.

Of course Richard also has to pay tax on the rental amount, after the letting agent fee, so his annual income from the property will be:

£1,000 x 12 = £12,000 – 15% = £10,200 – 20% (basic rate tax) = £8,160. (Obviously this may be higher in the initial period as the pension withdrawal has resulted in Richard being an additional rate tax payer in the tax-year that he made the pension withdrawal).

This may sound attractive, however, there are a number of issues Richard needs to consider:

As a net income, relative to his original pension fund (£300,000) and the additional £6,842, the net yield from the rent is actually only 2.65% pa. Perhaps not as attractive as Richard initially thought it would be. He wonders how this compares with the yield his pension would have produced had he left the funds within his pension. If a mortgage was involved, for higher/additional rate taxpayers, the impact of the tax relief on buy-to-let mortgage interest payments could further reduce the yield.

Potential issues to consider

As well as considering if he would have been better leaving his money in the pension Richard will have to consider a number of additional issues as a result of his decision to invest directly in buy-to-let property, including: 

  • Some people may be liable to higher/additional rate tax. If Richard was to become a higher rate taxpayer he would receive a net return of £6,120pa, which reduces the net income yield relative to his original pension fund to 2% pa.

  • Capital gains tax will usually be payable on any capital gain (at the higher 18% and 28% rates-above the annual exemption) when the property is sold (spreading gain from property over a number of tax years can be difficult).

  • On Richard’s death, inheritance tax could be payable on the property.

  • There is no guarantee that the property will always have tenants, even short ‘void’ periods would have a significant impact on the return. For example, only one void month each year would reduce the above yield to below 2.44% (based on a basic rate taxpayer). Given that Richard is using the rent as his “pension” void periods could have a significant impact on his standard of living.

  • The deposit paid by the tenant needs to be lodged with the relevant tenancy deposit protection scheme (different schemes for England & Wales/Scotland/Northern Ireland).

  • There could be maintenance and/or repair costs (tenants may not always look after the property as the owner would wish). Large repairs like roof replacement, replacing central heating boilers can be expensive, may result in having to raise additional capital and will certainly impact on that yield.  

  • If the tenants can’t get in contact with the letting agent on a Saturday night, Richard may start to receive phone calls when the central heating boiler breaks down or such like issues.

  • Other costs may be applicable, such as service charges, factors fees, building insurance costs, costs which are usually paid by the property owner.

  • The value of the property may fall.

  • The rental amount could fall.

  • Unpaid rent may be unrecoverable and/or result in litigation costs, watchers of various television programmes will be only too familiar with the difficulties landlords can encounter in removing ‘undesirable’ tenants.

  • Litigation (and the costs of such action) may be required to remove a tenant who is unwilling to abide by the terms and conditions of their lease.

  • There is also an issue regarding Richard’s ability to access the funds tied up in the property, especially in a downward market, or periods where potential buyers have difficulty in accessing mortgages, or with a sitting tenant. Given Richard’s pension was to fund his retirement this may become a major issue.

  • Investing all his pension funds in property may result in a lack of investment diversification. Putting all your eggs in one basket can be a very high-risk strategy.

On the upside

  • The property may increase in value, this would increase his overall yield when he sells the property (increase in value would only be realised on sale and any gain would of course be potentially liable to Capital Gains Tax).

  • The fall in the relative value of Sterling may attract foreign investors which could inflate house prices. It was announced in the Spring 2020 budget that as of April 2021 a 2% non-UK resident Stamp Duty Land Tax surcharge will apply in England and Northern Ireland.

  • He may get a long-term tenant that pays the rent on time and looks after the property, and as such the rental yield, property prices and capital gains tax may be the only issues he needs to consider.

Of course, if Richard is adamant that property is his preferred investment of choice, he could have accessed the investment potential of property (albeit commercial) via a Self-Invested Personal Pension and/or investing in the various pension property funds (although we need to be mindful that Pension Property Funds may have the right to defer encashment or switching out of these funds in periods of high volatility, usually for a period of up to 6 months). Looking at each of these:

Self-Invested Personal Pensions (SIPP)

Within a Self-Invested Personal Pension Plan most providers permit direct purchase of commercial property, such as offices, retail units and factories. Commercial property can produce substantial yields.

While the risks attached to property values/ rental income/ void periods remain; as the investment stays within the pension the preferential tax treatment of pension investments is preserved, such as exemption from income tax, CGT and normally IHT.

The cost of the SIPP will likely be higher than standard Personal Pension plans, and the trustees will make additional charges for facilitating the direct purchase of commercial property, so this needs to be taken into consideration. Other indirect property investments are also available to SIPP investors.

Pension Property Funds

Collective investment in property, via various pension property funds, provides indirect access to many property based opportunities. Most providers have a property fund and may give access to other provider’s property funds.

These funds can usually be accessed within standard Personal Pensions, which usually enjoy a lower charging structure than SIPPs. Richard can then sit back and let the fund manager make all the decisions, and because the funds remain within the pension, the preferential tax treatment is retained.

Additionally, as there will be professional property managers involved Richard will not receive a call from tenants to complain about a broken boiler!


It is important to consider all available options when undertaking financial planning.

Things to think about include:

  • The level of risk being taken against the actual net yield received.

  • Recent legislative change appears to do little to encourage BTL investment and everything to encourage pension investment (pensions freedom).

  • With the longer-term ramifications of Brexit still unclear, the risk involved in investment into an undiversified, directly held, single asset class may have increased.

  • The decision not to take advantage of pensions, or to “cash-out” a pension to invest in an alternative investment, may have a significant impact in an investors quality of life today (use of pension contributions to manage tax traps etc.) and a permanent impact on quality of life in retirement, as such, it is a decision which should not be taken lightly.

This article is intended for general informational purposes only and
should not be considered as personalized financial advice. The Financial
Conduct Authority (FCA) regulates financial services in the United Kingdom, and
readers are encouraged to verify the regulatory status of any financial adviser
mentioned in this article.

Pensions and investment decisions involve risks, and individuals should
carefully consider their financial situation, objectives, and risk tolerance
before making any decisions. The content of this article is not a substitute
for professional advice, and readers are encouraged to consult with a qualified
financial adviser or planner for personalized guidance.

Past performance is not indicative of future results, and the value of
investments can fluctuate. The tax implications of pension decisions can also
vary based on individual circumstances, and readers should seek advice from a
tax professional regarding their specific situation.

While efforts are made to provide accurate and up-to-date information, we
do not guarantee the completeness or accuracy of the content in this article.
We do not accept any liability for any loss or damage arising directly or
indirectly from the use of the information provided.

Please be aware that investment products and services mentioned in this
article may not be suitable for all individuals, and it is important to
carefully read any product disclosures and consider the risks associated before
making any decision