Research by investment manager 7IM has found that shares have outperformed property on average massively since 2005. It found that, while the average house increased in value by 52% over the period, the average pension (which would be partly invested in shares) returned 135%. With this in mind, and plenty of other evidence pointing to shares being a great way to invest for retirement, here are three specific reasons I think a pension trumps property.
Government support for pensions
This is probably the big one. There is a clear contrast between the support the government provides to those investing in a self-invested personal pension (SIPP) versus landlords and homeowners. Those lucky enough to be able to save money – and it doesn’t have to be much to make a big difference – can benefit from a boost from the government of up to 45% on what they add into a SIPP.
For homeowners and landlords, the taxes on property and inheritance are particularly punitive, especially when compared side by side with the tax advantages of investing in a pension.
Managing investment properties in particular if you are a landlord is time-consuming and can be quite a hassle, from dealing with late payments, to finding new tenants, dealing with repairs and so on.
I know that many private investors enjoy investing in shares. Dividends from companies are paid on time and can be instantly reinvested into more shares, or enjoyed as income. Shares are easy to buy and are easy to sell, although if you invest in the smallest companies or there is a violent downswing, they can be harder to shift. The share-selling process can be done from your laptop.
When downsizing property – which is much harder to do than you’d think – all your eggs are in one basket. If property prices plunge at the same time as you want to sell, you’ve got a big problem on your hands, potentially with little to fall back on if your house is your pension.
Shares and investments held within a SIPP have far greater diversity potential. Some types of shares are counter-cyclical so may go up if the stock market crashes. Recoveries in share prices following market crashes tend to be quite quick, meaning the impact on a pension will often be limited.
Investment trusts and funds, in particular, can offer greater exposure to developing markets. FTSE 100 companies likewise are often a way for an investor to gain access to some of the world’s emerging companies which could see stellar growth in the coming years.
The three reasons above highlight why I believe investing in a SIPP makes for a better retirement fund than relying on property. Of course, combining owning your own property with a SIPP would be an ideal combination, but if I had to choose one or the other, I’d go with shares every time.
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Andy Ross has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.