Crunching the numbers: How pensions and property square up for investors

Two years ago while skiing in France I got into an embarrassingly heated debate with three Norfolk farmers about the merits of property investing versus saving in a pension. The trio were bricks and mortar evangelists and refused to even countenance the possibility investing their hard-earned cash in stocks and bonds – or even worse, paying a fund manager to do it for them – could be worth considering.

One even insisted – without a hint of irony – that “property prices are only going to go up”! Luckily I had a copy of ‘The Big Short’ to hand, although I resisted the temptation to hit him over the head with it.

The exchange did, however, get me thinking about the merits of investing in property and why – despite the devastating short-term hit of the financial crisis – many still see it as a low-risk, high-reward route.

With that in mind, I thought it’d be worth looking at the history of property investing versus stocks and shares, the arguments for and against each, and whether direct exposure is ever the best option for retirement investors.

Head-to-head: Buying a house vs investing in the stockmarket

To kick-off, let’s consider how property has performed over a retirement time horizon – so 30 years plus. The below graph charts movements in average inflation-adjusted house prices since 1979 and goes some way to explaining property’s enduring popularity among investors.

It shows that someone who bought a house in the UK some 38 years ago would, on average, have seen its value after inflation go up by around 2.6% a year. To put it another way, a house bought in 1979 would have more than doubled its real value, from £93,588 to almost £210,000. That’s a real return of about 125%.

Source: Nationwide Building Society

Of course, lots of ordinary people think in nominal rather than real terms – this makes the investment look even better, rising in value by over 1,000% during the period. Anyone who looks at those sorts of numbers will, rightly, argue they have done pretty well for themselves.

For many people investing in property isn’t just about how much the asset itself is worth - buy-to-let has become increasingly popular among those investing for retirement. There were around 1.8million buy-to-let mortgages with an aggregate outstanding balance of £214billion in 2015, up from 840,000 mortgages with a balance of £93.2billion at the end of 2006 (Source: Council of Mortgage Lenders).

The logic for an investor of buy-to-let is clear – you can benefit from capital growth over the long-term and potentially generate a stable income by renting the property out. Get a reliable, long-term tenant in place and you are golden.

And with affordability checks making it harder for people to get on the housing ladder and supply squeezed, many expect demand for rental properties to keep rising. Provided the cost of mortgages remains low – and the Bank of England base rate continues to trundle along at 0.25% – rental yields on buy-to-let could continue to look attractive for the foreseeable future.

A recent survey by Kuflink, a peer-to-peer property lender, suggests the highest-yielding area in the UK – Manchester – delivered 6.7% last year. It’s worth noting that yields vary across the country, with Cambridge posting the lowest rental yield of just 2.7%.

How does the stockmarket compare?

The below graph tracks the performance of the FTSE All Share from 1979 to present day – the same period as covered by the Nationwide house price data. The value of companies on the index has soared over the period, from just over 220 in 1979 to almost 3,900 in 2017 – delivering a nominal return approaching 1,700%.

How the FTSE All Share has surged since 1979

Source: Thomson Reuters Datastream

That means £10,000 invested in the FTSE All Share in 1979, excluding the impact of costs and charges, would be worth somewhere north of £160,000 today. In other words, it has comfortably outperformed the UK property market over the period in question (although there is no guarantee this will continue into the future).

Clearly this is only part of the picture. Where buy-to-let investors look to rental yields for income, stockmarket investors rely on a steady stream of dividends which can then be reinvested.

The FTSE All Share average dividend yield has been just shy of 4% since 1979 - so below the very top of the buy-to-let average in the Kuflink survey but better than the returns on offer for property investors in Cambridge. The average dividend yield has dropped substantially since the dizzy heights of the early 1980s, however, with investors receiving average annual payments of just 3.4% in 2016.

Note, however, that the actual sums paid out in sterling terms have continued to rise and the yield has fallen because share prices have risen faster than dividends, providing capital returns to complement the income.

Average dividend yield (1979 - 2017)

Source: Thomson Reuters Datastream

It is dividends and the ability to reinvest them and let compounding work for you that makes the difference when investing in equities. It’s also worth noting that potential house price growth is often based on historical trends which are unlikely to be repeated.

Beyond the numbers

The argument about investing in property versus stocks and shares isn’t just about historical numbers.

Anyone hoping to rely on buy-to-let for their retirement needs to be realistic about exactly what’s involved and the potential risks. Working out the costs and income from buy-to-let makes pensions look a doddle – you have to think about Council Tax, Stamp Duty, ground rent and numerous other potential charges.

There are also unknowns including property repairs and maintenance, and the possibility of periods where it will generate no income when tenants move out. Anyone investing in buy-to-let for their retirement should consider how they will generate an income in these circumstances.

In short – investing in buy-to-let is hard work.

While there is still work to be done on improving the transparency of costs and charges in pensions, they are infinitely simpler and less time-consuming to manage than a buy-to-let property.

One of the great benefits of retirement investing is the ability to diversify. You can invest in a range of different asset classes from around the world at relatively low cost, meaning volatility can be mitigated and managed. Investing in property, on the other hand, means all your eggs are in one basket and so you are vulnerable to a dip in the market just before you decide to sell.

Pensions are also now extremely tax-efficient and can be passed on to beneficiaries tax-free if you die before age 75. A buy-to-let property, on the other hand, could be subject to Inheritance Tax.

For most people a pension is going to be the best starting place when saving for retirement – you get tax relief, an employer contribution in the workplace and any growth is free of Capital Gains Tax. They also have the benefit of allowing you to pay in small amounts, whereas a direct property investment requires a significant upfront deposit payment.


For those intent on putting all or some of their retirement eggs in the property basket, there are other avenues worth considering.

A Real Estate Investment Trust (REIT) is a good alternative option, although advisers and clients are unlikely to want to take on stock-specific risk. As such, investment trusts which specialise in quoted property stocks is one angle to consider, while patient advisers and clients could also investigate a commercial property fund, where there is a wide range of choice and fund manager expertise available, albeit in exchange for a fee.

Residential property is harder to access as fewer funds specialise here. Hearthstone UK Residential Property has a longer history than most. M&G UK Residential Property began trading in 2013 and targets purpose-built, managed apartment blocks.

And while commercial property funds suffered post-Brexit, with a number imposing suspensions to prevent a surge of redemptions, a pension is a long-term investment and so a relatively short-term measure such as this should not be too much of a concern for most people.

All of this is not to say that buy-to-let is bad or inferior to stockmarket investing – you just need to go in with your eyes open to the challenges and potential risks. For most people buy-to-let should only be considered as an investment once a solid pension foundation has been built up.

It is certainly not the easy or hassle-free route to retirement security some people imagine.

Senior Analyst

Tom Selby is a multi-award-winning former financial journalist, specialising in pensions and retirement issues. He spent almost six years at a leading adviser trade magazine, initially as Pensions Reporter before becoming Head of News in 2014.

Tom joined AJ Bell as Senior Analyst in April 2016. He has a degree in Economics from Newcastle University.