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Wealth firm warns of “buy to regret”

Financial advisers have warned that taking advantage of the pension freedoms and using your pension to buy a property is not the most tax efficient use of your money.

Tony Mudd at St. James’s Place said that retirees tempted to invest their pension pot in property should think carefully.

“The government has empowered a generation of retirees to do much more than they could before, including the idea of investing in the buy-to-let property market. With meagre returns on cash savings, buy-to-let offers the potential for attractive levels of rental income and capital gains and retirees may feel they can tread a more familiar path by investing in bricks and mortar,” he said.

“There’s no doubt buy-to-let can offer some attractive upsides, but investors who have saved diligently into a pension because of the tax breaks will baulk at the prospect of handing back 40% or more in tax. Those who understand the need to maintain their standard of living throughout retirement will be working hard to minimise the tax they have to pay.

“According to a recent HSBC study (May 2014), gross rental yields in some property hotspots can be as high as 7 or 8% per year. As impressive as this sounds, buy-to-let is not necessarily the fail-safe investment opportunity these figures suggest; there are many other factors that need to be taken into consideration.

“Residential property cannot be held in a pension, people purchasing a house or flat will firstly need to draw the required sum from the fund. The new rules make it possible to withdraw the whole fund, with 25% available tax-free but with further amounts taxed at the individual’s marginal rate of income tax. People taking a large withdrawal could therefore find much of it, along with any other income for that year, taxed at the higher 40% rate, or the top rate of 45%.”

Mudd warns that the potential tax burden doesn’t end there. If the value of the buy-to-let property rises sufficiently, it will be liable for Capital Gains Tax when sold. In addition, any property owned by the individual forms part of their estate for Inheritance Tax (IHT) purposes.

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  • Richard White

    From a personal perspective, we are seeing very little of this going on although it seems as though it is to some degree, across the country as a whole.

    We have advised clients that it is unlikely to be wise to encash pension assets it order to BTL for all the reasons mentioned here.

    There is, however, one compelling factor that cannot be quantified by using a calculator and that is the clients desire to own something tangible. Trust in financial institutions and pension funds has been massively damaged in recent years and in some cases people would rather pay the extra tax and invest in something they can a) go and visit and b) isn't going to be stolen by a modern day Robert Maxwell.
    They'll pay their taxes and take their chances and there is nothing wrong with this, as long as they go into the venture armed with the facts and with their eyes open.

    The best scenario for the investor is to have both pension plan and buy to let, if possible and try to conform to the old adage about eggs and baskets.

  • Kenny Sahota

    I agree, Richard. Every pensioner in the country cashing in on their money and investing it in a buy-to-let was never going to happen - it was ridiculous scaremongering. But for some pensioners it is a viable, sensible option. Rewards from buy-to-let can be great, especially given the current market conditions. I don't think all these so-called experts fully understand the security that owning a number of properties can bring. Also, people over the age of 55 tend to have more time on their hands - they may be semi-retired or fully retired. As such, they can dedicate more hours to looking after their properties/tenants. Win-win.


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