Is the road to riches in retirement paved with bricks and mortar?

As Britons snap up houses instead of taking out a pension, Melanie Bien asks if buy-to-let is the best bet

We used to put money in stocks and shares for our retirement; now it's in bricks and mortar. The traditional pension is being shunned in favour of property. New research reveals that more and more investors are turning to houses rather than the mix of equities, bonds and a smattering of commercial property that make up managed pension funds.

We used to put money in stocks and shares for our retirement; now it's in bricks and mortar. The traditional pension is being shunned in favour of property. New research reveals that more and more investors are turning to houses rather than the mix of equities, bonds and a smattering of commercial property that make up managed pension funds.

According to the survey, from the Joseph Rowntree Foundation for the University of York, buy-to-let landlords intend to live on the rental income generated by their properties when they retire. Many of those surveyed had started investing in residential property because they were dissatisfied with the performance of their personal or occupational pension schemes, as well as their other investments in stocks and shares.

"Property is an extremely viable alternative to a pension," explains Simon Tyler of Chase de Vere Mortgage Management. "We might be nearing the peak in house prices right now, but we are a small island with a drastic shortage of housing, so demand for property will always be strong in the long term."

It seems that a lot of people agree. By the end of last year, an estimated 275,000 buy-to-let mortgages, worth more than £24bn, had been taken out, and brokers see no sign of the market slowing down. Indeed, although there has been talk of buy-to-let as a "bubble" that has burst, with rental yields falling in some areas and void periods - where the property lies empty between tenants - becoming increasingly common, many people are still undeterred.

Buy-to-let investing is a tempting option because it offers a heady mix of long-term capital appreciation with an income in the short term.

"The beauty of property as a pension investment is that even if house prices fall, the property will continue to provide an income," adds Mr Tyler. "When the economy is not performing well, or when interest rates rise, or even when house prices fall, demand for rented accommodation increases because fewer people want to commit to buying."

Bricks and mortar also has the advantage of giving you more room for manoeuvre. Pensions are, by their very nature, inflexible: the whole point is that you can't get your hands on your money until you reach 50. Although property is illiquid to the extent that you have to wait until you find a buyer before you can get your hands on the money, it is still easier to turn into hard cash than a pension - a useful feature in an emergency.

"Property is not the most flexible investment: there are heavy costs involved if you want to get out even if you do reap good capital growth," says David Hollingworth at mortgage broker London & Country. "But of course it is more flexible than a pension as you can have an income in the interim."

The main attraction, though, is that bricks and mortar is tangible: you know exactly what you own and, if you wish, you can leave it to your children. Pensions aren't that straightforward; many people aren't sure exactly how much their investment is worth because scheme statements can be confusing. And you can't bequeath your pension in your will.

Pensions shouldn't be written off, however, as they do have their advantages. For a start, the tax breaks are unbeatable: every 78p that a lower-rate taxpayer (66p for a higher-rate payer) contributes to their pension fund is topped up by the Government to £1.

At the age of 50, you can choose to take up to a quarter of your pension pot as a tax-free lump sum. The remainder must be used to buy an annuity - a guaranteed income for life - by the age of 75. While critics argue that annuity rates are disappointing and buying one is restrictive, the advantage is that you know you will receive a fixed amount of money every year for as long as you live. And in retirement, that sort of certainty is likely to be invaluable.

While property and pensions both have their pros and cons, insurer Standard Life argues that when it comes to the most important factor - which one provides the better return - pensions win hands down. According to Standard Life research, a basic-rate taxpayer investing £33,985 over 25 years would see an annualised rate of return of 13 per cent (£726,737) if he or she chose to invest in property. This assumes that £5,000 of that sum is used to meet the initial purchase costs of a single property - such as stamp duty - and the expense of furnishing it, while the remainder is put down as a 25 per cent deposit.

If that person decided instead to invest in a pension, it would have generated a return of £1,262,381 or 15.6 per cent over the same period - £535,644 more than the property investment.

"Too much of the nation's wealth is tied up in property," warns Tom McPhail, pensions research manager at independent financial adviser (IFA) Hargreaves Lansdown. "This is a destabilising and unhealthy state of affairs. A lot of people have made a lot of money out of property, but sooner or later the fun is going to end. And by the time most people realise that, it will be too late to do anything about it."

But he doesn't warn investors off property completely. "It is far better to spread your investments across a range of asset classes rather than focusing too heavily on one area," he adds.

If possible, keep plenty of balls in the air when planning your income in retirement. It makes sense to have some property in your portfolio because it tends to increase in value over the long term, but you shouldn't forget a conventional pension, either.

"It pays to have a spread of investments," recommends Mr Hollingworth at London & Country. "People are learning that they shouldn't put all their money on the pensions boat just in case it doesn't come in. And with property there is the risk of the market crashing - at just the wrong time.

"Stocks and shares have done well over the long term but so has property. You have got to have the right mix."

To receive a free copy of 'Too Little, Too Late? Are You Saving Enough for Retirement?', from IFA The MarketPlace at Bradford & Bingley, call 0800 113333.

A lifestyle maintained by becoming a landlord

Frances McNaughton, 42, a self-employed sugar craft tutor from Tunbridge Wells, Kent, became so worried about the limited size of her pension that she decided to opt for a buy-to-let property instead.

"My personal pension is not very big because I am self-employed, even though I do contribute to it on a monthly basis," she says. "My financial adviser told me that the way things were going, I would end up with about £11,000 a year in 20 years' time, which would mean curtailing the lifestyle I lead at the moment."

So when the ground-floor flat underneath her maisonette came up for sale two years ago, she snapped it up. "It made a lot of sense to invest any money I had in a property rather than a pension," she adds. "I let out the flat through an agent and, so far, have had few problems.

"There used to be a bit of a problem with tenants knocking on my door - on one occasion because slugs were coming into the flat. I had to point out that this was nothing to do with the landlord - it was the tenants' responsibility," she says. "But apart from that, most complaints have been genuine."

She is not ruling out buying further properties once she "gets used" to being a landlord and is assured that everything is running smoothly.