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Pensions & Buy To Let

From the 6th April 2015, over 55’s will now have the option to take pension benefits from personal pensions without having to buy an annuity. In simple terms, this means you will be able to withdraw funds from your pension fund (up to 25% of the fund value each year tax free) which potentially could be invested in alternatives such as property.

With this in mind, coupled with poor annuity rates currently being achieved and high pension charges, property could be a profitable alternative. Property growth forecasts and above average yields already being achieved in the sector, all point in the direction of buy to let property being something to seriously consider.

Historically house prices over the long term have always risen. Even in times of recession and temporary dips in property prices, they have always recovered and risen beyond previous highs usually by some considerable margin. Long term landlords also benefit in times of low or negative capital growth, tenant demand increases forcing rental values to increase too.

Recently the Observer conducted an exclusive poll that revealed that one in three people are relying on property to help fund their retirement. More than 50% of people are considering selling their property to generate cash to help top up existing pension provisions.

With the stock market being volatile many people are looking towards property as a real alternative to traditional pension options.
Property is best viewed as a mid to long term investment, ideally 10 years plus. This will allow for long term capital growth.

Advantages & Disadvantages

The major advantage of a traditional pension is employer contributions and tax relief. Some employers might contribute an equal amount as you do, which would result in a high yielding return on investment. If you earn up to £44,000 pa you could get up to 40% tax relief on pension contributions.

With property, if you are in the higher tax rate bracket, you will have to pay both income taxes at your highest rate on any rental income plus any CGT if you choose to sell an investment property. Currently, anyone with a pension can withdraw 25% tax free as a lump sum. From April 2015, the new pension legislation will allow a lot more flexibility for retirees allowing them to choose how they invest their pension funds and reducing the current 55% tax rate imposed for withdrawals above 25% of the pensioner’s personal tax rate.

Timing Is Key To Maximise Returns & Minimise Tax Liabilities

Retirees need to be aware of the risks and tax implications. If you choose to invest in property you can either purchase by placing a deposit and mortgaging the balance, or purchase the property outright if there are sufficient funds available. With such a large proportion of people who are coming up to retirement age, who are unhappy with traditional pension performance, we predict a huge influx of new investment into the buy to let sector.

If you are considering using your pension pot towards investing into a buy to let investment then you need to consider that your pension is balanced .Property should not be the only option but a means to maximise your overall returns.

A sensible approach is to gradually release equity from your pension to help mitigate the tax payable on the withdrawals.

Using an example of someone with a £200,000 pension fund from April 2015, they could withdraw the whole amount. £50,000 would be tax free but the remaining balance of £150,000 could be liable to take at the 40% level generating a tax liability of up to £53,600.

If however, the person decides to withdraw £50,000 per year over the next 4 years they would receive £12,500 tax free (25% of the withdrawn amount) and would be liable to income tax on £37,500 which could be as little as £5,500 if they are a lower rate tax payer. This would reduce their tax liability from £53,600 to £22,000 saving them over £30,000 just in tax.

Seek Professional Help

As with any type of investment there are risks. It is important to try and reduce these risks at the outset. It’s really important to understand the potential downsides of investing in property and it is advisable to have a balanced pension portfolio of a variety of assets.

It is fundamental to know how to finance any investment correctly, to ensure you get a desirable return for your retirement and for the potential as being valuable part of your estate and your family’s future inheritance.

Let’s look at an example

Mr Smith currently owns an investment property worth £100,000 which has buy to let mortgage of £32,000.

He wishes to draw down £50,000 from his £200,000 pension fund in April 2015. After paying tax and assuming he is a lower rate tax payer he clears the outstanding mortgage on the property.

The property provides a 7% yield (£7,000 per year or £583/mth) income PLUS he owns an asset valued at £100,000.

Let’s assume property prices rise by 3% per annum over the next 10 years as do rents.

After 10 years his property is worth around £135,000 and assuming the rental yield has been maintained at 7% then annual rental would be £9450 or £787/mth.

I hope this demonstrates the options that are now available for people who are about to retire so that they have more choice and flexibility to invest their pension funds into areas they consider that will provide the best returns during their retirement.

Want More Information?

If you are considering investing in property, using your pension funds, please contact one of the team at Mayweather Estates on 0161 212 7414 or email us at