Special Features

BTL or traditional pension?

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6th May 2015
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Andrew Griggs, senior partner at Kreston Reeves and Tim Maakestad, it's financial services director, talk about using buy-to-let investment as an alternative to traditional pensions.

Changes to the pension rules have further opened up buy-to-let as an investment opportunity for people wanting to avoid annuities and their generally low rates of return.

The property market, by contrast, has grown strongly in recent years, offering higher rewards than have been available with ISAs, bonds or even equities.

There are other encouragements making property enticing for newly-liberated pension money. The UK population has increased by 5 million over the last 15 years, far outstripping the supply of new homes. This has led to an under supply of accommodation.

It is also harder for individuals to get onto the property ladder in the first place, further stoking the rental sector.

The number of buy-to-lets has doubled in the last 18 years, with one in five houses now having a private landlord, a figure expected to rise to one in three by 2032.

Given these pressures, it is not surprising that the private rented sector has expanded from 2.4 million properties to 4 million; and that there has been a resurgence of lenders in the buy-to-let market as the economy has strengthened following the recession.

Add base rates now in their seventh year at 0.5 per cent, and predicted to remain low for a while, it is hardly surprising that the income and capital returns from residential buy-to-let properties are appealing.

In this climate, and with the pension legislation changes now taking effect, individuals may be considering whether their pension pot is the best place to keep retirement money.

From the age 55, a pension holder can withdraw up to 25 per cent of the value of their fund tax free. It could be used to buy a property outright, or partly with debt for those able to secure a mortgage.  

As individual pension pots do not allow residential property to be included, this could anyway be seen as a useful form of investment portfolio diversification.

But there are drawbacks to going further with a property investment to take advantage of the changes. Whilst up to 25 per cent of the pension pot is tax free, withdrawal of the balance will be taxed at an individual’s marginal tax rate up to 45 per cent.  

Consequently, there could be a balance between what an individual leaves in their pension fund and the amount extracted to potentially avoid paying this rate of tax. For example, extracting the pension pot over a number of years could reduce the overall tax bill to a more reasonable 20% and advice should be sought from your accountant before making this decision.   

There are also other costs to consider when purchasing buy-to-let property. These include  stamp duty, selling agents fees, letting agents fees and the potential for a Capital Gains Tax liability on sale of the property. If you then build in the possibility of a bad tenant or a period without a tenant then this could seriously impact on the overall profitability of this type of investment.    

However, as with all investments, there is a balance between risk and reward. Whilst the pension changes may motivate individuals to take pension money and invest in buy-to-let properties for themselves and future generations, prudence always suggests spreading risk between investments. As the saying goes: best not to have all your eggs in one basket

Clearly there are other factors that also need to be taken in to account when planning for income at retirement. These include debt repayment and retaining sufficient liquid capital for emergencies and known future expenditure. Property can be a very illiquid asset if money is needed at short notice.

Pensions are not a one-size fits all proposition. Every individual has different requirements. It is wise to seek advice from a suitably qualified independent financial adviser before making a move and, to quote another saying, deciding that nothing is as safe as houses.  

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