Pension vs Property for Retirement: Which Works Harder?

When planning for retirement, the pension vs property question is an important one. Money held in a pension has one practical advantage over money tied up in your family home: once you can access your pension benefits, that money can help fund your retirement.

Accessing the wealth built up in your home will usually involve selling, downsizing or borrowing against the property. For someone who has spent years building wealth and would like to remain in their family home, this can become particularly important in retirement. Your home may be worth far more than you originally paid for it, while you still need a regular income to cover your day-to-day costs once your salary stops.

Both the family home and a pension benefit from favourable tax treatment. A pension also offers valuable tax relief while you are building it. Qualifying contributions can receive Income Tax relief of up to 40%, meaning a €10,000 pension contribution could cost €6,000 after relief. [4]

Being a millionaire does not necessarily mean you can afford to retire

A household that bought a home years ago, paid down the mortgage and contributed to pensions throughout their working lives may have built up considerable wealth. Their combined assets could be worth more than €1 million after debts, even if they have never thought of themselves as millionaires.

The CSO’s Household Finance and Consumption Survey 2023 found that the wealthiest 10% of Irish households had net wealth of at least €1,024,000. The family home accounted for 46% of gross household wealth across all households. [1] The figures relate to households and help show how substantial wealth can sit alongside a fairly ordinary monthly budget. Where that wealth sits can make a real difference once you retire.

Pension vs property: what could this look like in practice?

Consider two households, each with €1.5 million in combined home and pension wealth and no mortgage.
Household A
Family home: €500,000
• Pensions: €1 million
• Total wealth: €1.5 million

Household B
• Family home: €1 million
• Pensions: €500,000
• Total wealth: €1.5 million

This pension vs property comparison shows that two households can have exactly the same overall wealth but be in very different positions when they retire.

Household A has a greater share available through pensions to support retirement, subject to pension access rules and tax.

Household B has more wealth tied up in the family home. Accessing some of that additional value would generally involve selling, downsizing or borrowing against the property.

Pension vs property: how are they treated for tax?

The tax treatment of the family home is one of its attractions as an asset. Where the conditions for full Principal Private Residence relief are met, the gain on selling your main home is exempt from Capital Gains Tax. [2]
For example, suppose you bought a home for €350,000 and later sold it for €700,000. The €350,000 increase could be free of Capital Gains Tax if full relief applies. Periods of letting, business use or development value can affect the relief, so the tax treatment will depend on the circumstances.

Investments within a Revenue-approved pension generally grow free of Irish Income Tax and Capital Gains Tax. This allows investment returns to remain in the pension and continue to grow over time. Charges still apply, and investment values can fall as well as rise. [3]

The tax treatment changes when pension benefits are taken. Pension income and withdrawals are generally taxable, while the exemption on a qualifying family home can cover the gain made on its sale.

A pension also gives you tax relief on the money going in

A further advantage of pension saving comes before any investment growth takes place.
Qualifying personal contributions attract Income Tax relief at your marginal rate, within Revenue limits. There is no USC or PRSI relief on employee contributions. [4]

Example: a €10,000 pension contribution

For someone entitled to full Income Tax relief at 40%:
• Pension contribution: €10,000
• Income Tax relief: €4,000
• Net cost: €6,000
The full €10,000 goes into the pension before charges.
At a 20% Income Tax relief rate, the same €10,000 contribution would have a net cost of €8,000.
Pension contributions therefore have an upfront Income Tax advantage that does not generally apply when take-home pay is used to buy a home or repay mortgage capital.
The amount of relief available will depend on your earnings, tax rate and Revenue limits. Tax relief reduces the cost of contributing, while investment returns and eventual pension benefits will vary.

How much can you contribute with tax relief?

For personal contributions, the relief available depends on your age and relevant earnings. Revenue also caps the earnings used in the calculation at €115,000 a year. Existing employee pension contributions count towards the relevant limits. [5]

Example: pension contributions at age 52

Take someone aged 52 with relevant earnings of €80,000:
• Age-related contribution limit: 30%
• Maximum qualifying personal contributions: €24,000
• Income Tax relief at 40%: €9,600
• Net cost: €14,400

If €8,000 has already been contributed through their employer’s pension scheme, the remaining scope would be €16,000, assuming there are no other personal contributions using the allowance.
If the full €16,000 qualifies for Income Tax relief at 40%, the net cost would be €9,600.
The amount you choose to contribute should also work comfortably alongside your current expenses and leave room for unexpected costs. Pension money is generally committed until benefits can be accessed under the rules of your arrangement.

Turning pension savings into retirement income

At retirement, a pension can provide a lump sum and an income, with the options available depending on the type of pension arrangement.
A personal pension, for example, normally allows a retirement lump sum of 25% of the fund. The lifetime tax-free allowance for retirement lump sums is €200,000 across all sources. [6]

Example: an €800,000 pension at retirement

Someone retiring with an €800,000 personal pension could take a €200,000 tax-free lump sum, assuming they have not previously used any of their lifetime allowance.
The remaining €600,000 could then provide taxable retirement benefits through the options available to them, such as an annuity or an Approved Retirement Fund.
An annuity provides an income under the terms agreed with the provider. An Approved Retirement Fund allows eligible retirees to keep their money invested and make withdrawals over time. Those withdrawals are generally taxable, and the fund needs to be managed carefully throughout retirement.
Your home can, of course, form part of your retirement planning too. Some people may choose to downsize later in life, while others may consider borrowing against the property where appropriate. Both involve decisions about where you live, the costs involved and how much equity you want to retain.
A well-funded pension gives you another source of retirement income and greater choice over what you eventually decide to do with your home.

Building wealth you can use

When considering pension vs property as part of your retirement planning, it is worth looking not just at how much wealth you have built up, but where that wealth sits and how easily it can provide an income. Start with the amount you expect to spend each month in retirement. From there, look at the income you expect to receive from the State Pension, existing pensions and any other sources. This will give you a clearer picture of any gap you may need to fill.

For someone with a significant amount of wealth tied up in their family home, building pension savings alongside it can provide greater flexibility and a source of income to support the retirement they have planned.

At LHK, we can help you review your existing pensions, understand the tax relief available and put a contribution plan in place that fits your finances and retirement plans.

Book a complimentary call with one of our financial advisers to discuss your retirement plans.

This article is for general information only and does not constitute financial, tax or legal advice. Examples are illustrative. Pension benefits, tax treatment and available options depend on individual circumstances and may change. The value of investments can fall as well as rise. You should seek professional advice before making or changing a pension arrangement.