Pensions better than property? And, how a nudge might make you wealthier in later life
The property boom of the last few decades has given rise to the idea of a home not just as a castle, but as bonafide crock of gold which can be used as an alternative to a pension.
Pension provider Standard Life has carried out research that shows how different generations are answering the age-old question of property or pensions.
Standard Life’s Retirement Voice found that baby boomers favour using their pension to fund retirement over a property , 46 per cent compared to 16 per cent.
But among Generation Z, two-fifths, or 38 per cent ,said they would rely on property to pay for their retirement, compared to 35 per cent who would use their pension.
Overall, twice as many UK consumers see their pension as their main asset for retirement over property – 43 per cent versus 20 per cent.
Standard Life, part of Phoenix Group, also found that a quarter (26 per cent) would use both their pension and property to finance their retirement.
It is not surprising older generations who have had longer to formulate their plans and are closer to having to generate an income from their assets prefer to use their pension to pay for retirement; 46 per cent of baby boomers prefer pensions despite being the generation most likely to own property.
And while only 16 per cent are relying on their property, just over a third see a combination of both property and pension as the main way to fund retirement.
Pensions are increasingly more likely to be used as the main retirement asset with older age groups:
| Gen Z | Millennials | Gen X | Baby Boomers | |
| Pension | 35% | 42% | 42% | 46% |
| Property | 38% | 23% | 18% | 16% |
| Both pension and property | 26% | 35% | 37% | 35% |
Pensions pip property overall
Overall, across all generations, pensions are the most popular choice to fund retirement – 43 per cent compared to 20 per cent who would choose property; a third would pick both.
Dean Butler, managing director for customer at Standard Life commented: “Where you stand on the question of property versus pensions will be determined in part by your age. Generation Z is more focussed on using a property as their main retirement asset, which may be because saving for a flat or house purchase is more of an immediate priority for this group. However, as Gen Z is the first generation eligible for automatic enrolment from the first day of their working lives, many will be building up retirement savings by default and therefore are perhaps less aware of the potential pension pot they could grow in their lifetime, and how advantageous this can be due to employer contributions and government tax relief. As these sums grow, many will no doubt come to value their pensions more highly.
“There’s no doubt the younger generation faces difficult trade offs between saving for the longer-term and saving for a deposit for a house. Owning your own home in retirementcan be a real source of financial security and many will be targeting both property and pensions despite the challenges of doing so.
“Pension provision among older generations is mixed with some benefitting from generous defined benefit pensions, but also many, particular women, excluded from workplace pensions. What’s clear is that as the prospect of having to pay for retirement nears, using pension funds may feel a more realistic and flexible choice, whereas it can be trickier to realise the money you need from your main residence and options like buy to let investing can be a burden.”
Pensions versus property
Dan outlines the reasons for saving into a pension
- Tax relief – “Tax relief is what makes pension plans one of the most tax efficient ways to save for your retirement, effectively making it cheaper to save into your pension plan. This means basic rate taxpayers will get 20 per cnet tax relief from the UK Government on their personal pension payments, so it will only cost you £80 to have £100 invested into your pension plan. Most people are entitled to claim tax relief on the pension payments they make based on the highest rate of income tax they pay. This means the benefits are usually even more for higher or additional rate taxpayers.
- Employer contributions – “When you’re in a workplace pension scheme your employer is contributing a minimum of 3% of your qualifying earnings towards your future. Some employers will pay more than the minimum and others will pay more into your pot if you do – known as matching.
- Compounding – “Saving into a pension allows you to benefit from compound interest, and this is hugely advantageous. It means that when you leave money invested, you can potentially achieve growth not just on the original sum but on the growth as well. The benefits of this can be especially powerful if you’re still a while away from retirement age
- Tax free lump sum on retirement – “Once you reach your 55th birthday (rising to 57 in April 2028), you can take your pension at any point, and in several ways including purchasing an annuity to get a guaranteed income for life, or using drawdown to choose how much you want to take and when. Whichever option you choose, you’ll be able to take 25 per cent of your pension pot as a tax-free lump sum.”
Nudging pension savers at key life stages ‘could boost retirement outcomes’
Pension savers could be missing out on opportunities to boost their retirement income at certain key life stages, according to the Institute for Fiscal Studies (IFS).
It suggested that nudging employees to change their pension saving around major life events could have desirable effects.
The report suggested that higher minimum employee contributions for higher earners, or a form of “auto-escalation”, with default pension contribution rates increasing alongside rises in earnings, could nudge people towards saving more into their pensions.
Mortgage providers could also ask their customers in advance how much of their mortgage repayments they would like to divert into their pension when their mortgage term ends, the IFS suggested.
Paying off a mortgage, getting a pay rise, or seeing adult children leave home and become more financially independent, could be points where people find they have fewer spending commitments and more disposable income.
Missing out on pensions
But the IFS said older employees in particular could be missing out on an opportunities to use such events to boost their retirement income.
Research from the IFS, funded by charitable trust the Nuffield Foundation, indicated there is little evidence of people increasing their pension contribution rates by a significant amount upon paying off a mortgage.
And looking at the relationship between pay and pension saving, the report said: “We find changes in earnings still have a small effect on pension participation in 2019-20, except for when they lead to someone earning at least £10,000 a year and their employer therefore being required to enrol them automatically into a workplace pension.”
Laurence O’Brien, a research economist at the IFS and an author of the report, said: “Many employees might baulk at the idea of devoting more of their pay cheque to their pension in today’s high-inflation environment.
“But when people do have extra cash available, either because of a pay rise, paying off their mortgage or their children leaving home, very few employees put any of this extra cash into their pension.
“Given concerns that many private sector employees are at risk of under-saving for retirement, a natural question is whether changes to public policy could help them increase their pension saving when it makes more financial sense to do so.
“For example, higher default employee pension contribution rates at higher levels of earnings, particularly above the higher-rate threshold, or at older ages could help many make better saving decisions.”
Researchers used various sources for the report, including Office for National Statistics (ONS) figures and other research documents.
Tim Gosling, head of policy at People’s Partnership, provider of the People’s Pension, said: “This research shows just how much people’s retirement savings behaviour is shaped by decisions taken for them, not by them.
“Whether people save is strongly influenced by automatic enrolment and how much they save is shaped more by the generosity of their workplace pension contribution structure than by their earnings.”
Vicky Shaw, Press Association