Buying a property with your pension fund

Posted By: Phil Handley DipPFS AwPETR On April 8, 2015 Category: Uncategorized

So the pension freedoms are finally here and you now have unlimited access to your pension monies. There has been a lot of talk about pensioners being irresponsible with their fund buying cars like the ridiculously priced Lamborghini. But what about the vast majority who are going to be responsible and either purchase one of the pension income products available or look for alternative investment vehicles to produce an income.

A much talked about option is to purchase a buy to let (BTL) property to provide an additional source of income. A BTL property could provide capital growth and a steady form of income to complement either a private or state pension.

Global index firm MSCI predict a significant rise in those reaching retirement venturing into the residential property market. The market has effectively found a new wave of budding investors with any over the age of 55 having access to large savings pots. There is speculation that this will bring a new influx of products to market in order to cater for the pensioner pound.

Certainly there are investment funds which invest in property, albeit largely commercial property, but there is a certain amount of comfort owning a more tangible asset. If you can touch and feel the bricks and mortar there is a feeling of more control.

There was a Buy to let property boom in the times before the latest financial crisis. Access to cheap easy money, with little or no deposit, and fuelled by the media fascination of property investment meant a surge in BTL landlords. The credit crunch and drying up of available mortgage loans quickly put a stop to it however. The last 7 years have seen banks be a lot more cautious with lending and as a result, preventing first time buyers getting on the property ladder. As a result renting has become the norm, yields have been creeping up and provided a real opportunity of good returns.

All this plays into the hands of pensioners with access to large cash deposits. Just this week a survey by the Bank of Ireland suggest as much as 42 per cent of those reaching retirement may consider a buy to let property.

So is it a good investment? Well as with any investment there are considerations and risks. The first is on the withdrawal of pension funds. The first 25% is tax free but any remaining withdrawal is added to the retiree’s income tax bill. This could mean 20 per cent or even 40 per cent is lost to the tax man. A withdrawal of £100,000 would see £25,000 not subject to tax but a total of £19,400 paid in tax on the remaining 75 per cent. This would leave a net fund of around £80,600 (using a 65 year old, allowing for the personal allowance of £10,600 and no other income). There is an instant 20% loss on withdrawing funds in the manor.

Other considerations are the initial costs of purchasing a property, solicitors, estate agent and mortgage loan fees if you’re taking a mortgage out.

The rental yield also isn’t guaranteed and periods of none tenancy could see mortgage bills stack up.

Typical deposits for a buy to let are 25% but the more you can put down the less reliant you are on a tenant to pay the mortgage.

House prices have plat owed in the last few months so don’t expect any significant rises in value in the short term. The bounce in property prices from the financial crisis is all but over and as with stock market investment, a buy to let should be seen as a medium to long term venture.