Pension Or Property: The Big Dilemma

With so many demands on your cash prioritising your finances can be tricky. Here are some helpful hints.

Wouldn't it be nice if you could pay off your debts, start a pension, build-up a deposit for a house and enjoy yourself all at the same time? Nice, but often unrealistic.

With so many competing demands on your money, how do you work out your financial priorities when crucial decisions are not always clear cut? 

I'm going to look at a common dilemma: Is it better to make saving for a house deposit or planning for retirement your priority? So to begin, here are the pros and cons of going down the pension route first.

Pensions - Advantages

• What a pension needs above all is time and plenty of it. I can't stress enough that the earlier you start the better. In fact, by getting a head start you can save less and still end up with the same result had you started much later on. Even if you delay for just a few years you may need to hike up your contributions to build a reasonable pension pot. Take a look at How To Double Your Pension to see the full effects of putting off your pension planning.
• You'll also get the benefit of tax relief on your pension contributions. This means the tax you have already paid on your cash can be put into your pension fund. If you're a basic rate taxpayer you'll enjoy a 22% boost which means to invest £100 in your pension fund you only need to pay £78 out of your own pocket.
  
  
• If you're lucky enough to have an employer who is prepared to contribute to a work-based pension scheme on your behalf, it's almost certainly worth your while taking them up on the offer. You may be expected to pay into the scheme as well. Typically you'll be asked to match your employer's contribution. If you don't, you'll be missing out on that extra cash from your employer.
  
  
• Don't forget pension funds usually invest in shares which have the potential to grow in value over the years. Did you know that investing in shares has historically performed better than cash-based savings over the long-term? While it's true pensions are generally more risky than cash in the short-term, history suggests that shares will probably deliver better return over longer periods.

Pensions - Disadvantages

• But it isn't all plain sailing. When you make a pension contribution your money can't usually be accessed again until you retire. While this may help you to avoid the temptation to fritter, if you have more pressing financial commitments elsewhere there's no way of getting your hands on the cash.
  
  
• Remember also that many people have been disappointed with the returns generated by their pension fund, and the eventual level of income they have received in retirement. Unfortunately, the performance of your pension fund can't be guaranteed.   

Equally there's a case for (and against) prioritising your house deposit:

House Deposit - Advantages

• Runaway house price growth in recent years means many more of us now consider our home to be our pension, rather than a traditional scheme. In this way you can kill two birds with one stone and provide for your retirement by downsizing your home or releasing equity if that's appropriate for you. But remember future house price growth isn't guaranteed.
  
  
• Purchasing a home may be a more immediate and pressing need than your pension and therefore you might consider that your priority. But don't delay your retirement planning indefinitely.
  
  
• By putting down a larger deposit when you purchase a home you should benefit from a better mortgage deal. This means lower interest rates and therefore less outlay from you. Given that your mortgage will probably be your largest financial commitment it's sensible to make it as low-cost as possible.
  
  
• And the sooner you get on the property ladder the less money you'll waste as a tenant. You'll also enjoy mortgage-free living at an earlier age which means the money you have freed up can be spent on something else.

House Deposit -Disadvantages

• Looking at it another way you could apply for a 100% mortgage which means you won't need a deposit at all. Although this is unlikely to provide the most competitive deal, your savings may be put to better use elsewhere. Don't forget if you want to go down this route you'll still need a bit of cash behind you to cover mortgage fees and legal fees.
  
  
• What's more, accumulating sufficient savings over a comparatively short period can be a considerable drain on your finances leaving you with little spare cash. And since your savings aren't usually locked away, you might be tempted to raid your account if money gets tight.

Ultimately, deciding on your financial priorities will largely be influenced by your own circumstances. If, for example, you have accumulated large quantities of debt it may be better to tackle that first before you even consider a pension or house deposit. 

Almost everyone will want to purchase a home at one time or another and it's certainly the key to financial security later on. But you'll also need to plan for your retirement given that it's risky to rely on measly state benefits alone. Assuming you're able to save, a compromise between the two objectives is probably the best approach.

More: Mortgage Borrowers: Beware These Nasty Deals | The UK's Cheapest Pensions |Visit The Motley Fool's Savings Centre to find the best home for your cash.