Should I take money out of my pension to buy a Buy to Let property?
The new pension freedoms are prompting individuals to ask whether their pension fund might be better used elsewhere.
In some cases this has been prompted by poor performance of pension funds and in some cases by the very good performance of buy to let properties.
While the answer will be different for different people the simple answer lies in whether you will be better off.
Buy to Let
Buy to Let, yields on BTL properties are reported to be in the region of 7% and there can be increases in capital values of properties as well. It is this that is attracting money to this type of investment. There can be negatives however:
- Income tax is payable when you make a profit on your BTL
- Renting your own properties requires some knowledge and experience to do properly
- Things can and do go wrong including significant damage to the property
- Maintenance can be expensive and there is the danger of cowboy builders
- Using a property management company eats into rental yields and reduces profits
- Using maintenance companies to undertake regular repairs can be expensive
- You need to have the temperament to cope with the stresses strains and worries of owning rented properties
You will have heard success stories but in many cases these are from people with knowledge and experience of property rentals with excellent contacts in the building maintenance and arena or the ability to make the repairs themselves. Realistically in most cases returns will be lower than the 7% optimum figure quoted especially after tax.
It is true that some people have had poor experiences with pensions, but in many cases this is down to the underlying investments not being appropriate and not being regularly reviewed. I have spoken to individuals whose pensions have not increased significantly in value over 10 years or more. For those with an effective and regularly reviewed investment policy they could have received returns of 7% or more.
So is it effective to take money out of a pension? The answer as always depends on the circumstances. It is possible to take 25% of the pension fund without paying tax. If this covers the cost of your BTL and you have the right knowledge skills and ability to take on such a venture it may well be effective. It will change the death benefits on the remaining pension fund from being tax free to being taxed which will affect your family in the event of your death and needs to be taken into account.
For those who need more than the tax free cash, there will be income tax to pay on the withdrawals and this could be considerable. For those taking over £100,000 of non-tax free cash they will lose their personal allowance and pay an effective tax rate of 60%. In short the best possible scenario will be paying tax at 20%, but for those needing a sensible amount to buy a house, they will be paying effective tax rates of 40% or more necessitating even larger pension withdrawals.
- In a good number of cases, the tax burden of releasing money from a pension together with the costs, tax burden and the responsibility of buying and running a buy to let property, will not be as cost effective as sorting out an effective underlying investment for your pension
- In some cases it will make sense and is a perfectly reasonable thing to do, but only for those fully aware of the issues
- In balancing the benefit of BTL with pension there are many taxation considerations, it is very important to have an understanding of these when drawing up business plans
- Either way it is important to ensure that your pension plans are effectively invested and appropriate for your attitude to risk and capacity for loss
- An Independent Financial Adviser will be in a position to:
- Take you through the key considerations of using your pension to buy a buy to let
- Provide you with alternative ideas such as using a BTL mortgage and structuring your pension withdrawals to minimise the tax burden
- Review your pension plans to ensure they are appropriate whether or not you are considering withdrawing money now or in the future