The new pension rules that came into being in 2015 gave people a lot of options on how the made use of their pension pots. Previously when people decided to retire, they had to take the bulk of their accumulated pension savings and buy an annuity which would then provide them with a pension for the rest of their lives. In recent times, annuity rates have been quite low which restricts the amount of pension that could be purchased and on death, the annuity provider retained whatever cash was still their rather than you being able to pass it on as part of your estate.
Now, people retiring can access the whole of their pension pot and use it in whatever way best suits their circumstances. Many people in this situation have opted to use some of this money to purchase property and use the rent from that property as a pension. This may sound ideal and for some people it is. However, anyone thinking of dong this needs to look very carefully at their situation and as a minimum, seek qualified advice on all of the risks and tax implications that accompany this type of investment.
Using your pension for buy to let properties
Investing in buy to let (BTL) property using capital from your pension pot can be a good solution to improving your pension income as you would hope to obtain a steady monthly income from renting out the property and over time, hope to see the value of the property rise giving you a valuable legacy to leave to your children.
All of that is well and good but there are a number of things that will have to be considered if this is what you want to do. Some of these areas of consideration as shown below:
Income tax – Although you are now permitted to withdraw all of your pension pot which may be a very substantial amount, if you did this in a single tax year, only the first 25 percent would be free of tax and the remaining 75 percent would be added to your income in that year and taxed accordingly. If this made you a higher rate taxpayer in that year you might see some of your money being taxed at 40 percent.
Rental income – Rental income in recent years has been rising and providing you can keep the property tenanted you may do quite well. However allowances must be made for periods where you have no tenant and therefore no income while at the same time, you will have council tax and other costs to pay out.
Property prices – UK property has risen in value steadily over the past few years but thee is no certainty that this will continue into the future. Much will depend on the type of property you purchase, where it is located and the general performance of the UK economy and wage growth.
Your new pension options
The new pension rules that were introduced from April 2015 give you choices over how you use your pension pot. If you are 55 or over and are in a defined contribution pension scheme, you can choose to withdraw as much of your pension as you wish, giving you a host of pension lifestyle choices.
You may be planning to fully retire and need to get the best income that you can or you may have decided to cut back your hours gradually or even to carry on working full time. There are many possible choices and having access to you pension pot could let you plan well for the future.
Here are three of the options available to you:
Leave your pension pot untouched – If you intend to keep on working or if you have other income, you might decide to keep your pension pot invested to grow tax free and be taken later.
Buy an annuity – This is the traditional route where you have the option to take 25 percent of your pension pot as a tax free lump sum and use the other 75 percent to purchase an annuity that will provide you with a pension for life.
Flexible drawdown – With this option you would reinvest the pension pot into your chosen investment vehicle where it will grow in accordance with the performance of the investment vehicle and set the amount of money that you want to withdraw each month. You can alter the amount of drawdown from time to time to sit the return you achieve with the invested capital.
Risks – The main risks with this are that your investment capital may not achieve the results you expected and could go down as well as up. If you withdraw more than the investment is making then at some point in the future your investment will be zero. Were this to happen you would no longer have an income from that investment and might have to rely on the state to support you.
Investing in property for pensioners
When you have sufficient cash available to purchase your buy to let (BTL) property outright, many of the difficulties that can affect pensioners will have been removed as you wont have the problems of arranging mortgages and the worries of repaying a loan if you cant find a tenant. On the other hand, one of the aims of investors is to obtain the highest yield they can achieve on their investment and this is where they may use borrowing to reduce the actual amount of capital they have to lay out. This is termed as gearing which means that if property prices rise, you are getting that rise on the full value of your property while you might only actually own 25 percent of the property.
If you need to finance your buy to let (BTL) property through a mortgage, then there will be some important things to consider.
Your age – Lenders in the UK generally have an age cut of for offering buy to let (BTL) lending and this for many will be age 65. Terms will be up to 10 to 15 years so you must take into consideration that by the time you reach 75 to 80. you will be unlikely to be able to remortgage the property.
Mortgage interest types – Most buy to let (BTL) mortgages are taken out on interest only which keeps the monthly payments low. However, when you get to the end of the mortgage term, the full amount of the loan will need to be paid back to the lender. This may require you to sell the property to raise the funds. Repayment mortgages remove that requirement as the loan will be paid of by the end of the term. As pensioners would normally only have fairly short mortgage terms of 10 years or so, the monthly repayments could be quite high.
Deposits – the minimum deposit for mortgage purposes that must be put down on a buy to let (BTL) property is 25 percent.
