Buy To Let Updated:
The new pension freedoms announced in this year's Budget mean pre-retirees have far more options when it comes to spending their pension pot. The goal will always be to create a viable income stream throughout retirement, but a lot of people could well be tempted to give the traditional annuity a miss and make their own investments instead. It's thought that buy-to-let (BTL) could become an increasingly popular option, so could it be a way to help fund your retirement?
Well, if you go about it the right way, there's no reason that BTL couldn't be an alternative – or ideally a supplement – to traditional pension arrangements. The rule changes mean that you can now access all of your pension pot without being subject to such hefty tax charges – from April 2015, 25% of your pot can still be accessed tax-free, but you have the option to withdraw the remainder subject to your nominal rate of income tax (as opposed to the 55% tax charge currently levied).
Essentially, this means you can take out as much or as little cash as you wish, free to be spent as you see fit. It's thought that a lot of people will opt for a combination of different income-generating arrangements rather than withdrawing the whole lot in one go, such as taking a lump sum for their own investments and keeping the remainder in drawdown, or even putting aside some of it to purchase a traditional annuity.
The choice you make will entirely depend on your own personal circumstances, not to mention the size of your pot, but if you've decided that you want to withdraw a tidy lump sum and make your own investments, BTL could well be a viable possibility.
How could it work?
Once you've withdrawn the required amount from your pension pot, you're free to spend it as you wish. If you're hoping to start your property portfolio you'll need to go about it the same way as any other BTL investor, with the purchasing process being exactly the same – you find a suitable BTL mortgage, buy your property, and let and manage it from thereon in. Rents are incredibly healthy at the moment and tenant demand for suitable properties has never been higher, and if you treat the property as an investment in itself, in a few years' time its value could have easily increased.
When done well the returns can be impressive – in many cases far surpassing other forms of investment – and in that respect, it sounds like a simple way to fund your retirement. As long as your property is let you'll receive an income from it, and if you find you're struggling later on, you could always sell it or remortgage to free up some cash. If you did sufficient research – as all budding landlords need to do – you could well find you make a tidy profit from your investment, but everything from the location you buy in to the type of property you're looking for can have an impact on your ultimate returns.
Understand the risks
Of course, it isn't always as easy as that, and as with any investment, BTL is always going to come with some risks. Void periods are the biggest concern for a lot of landlords – if you don't have tenants you're not getting an income, but you still need to pay the mortgage on the property, so if you don't have a decent turnover you could end up out of pocket.
There are a lot of different fees and charges to consider as well, from legal fees and insurance policies to repair work and maintenance costs, and these could all eat into your profit. You need to thoroughly do your calculations to make sure your overall returns will cover any unexpected spending, and remember that a lot of BTL lenders expect to see returns of 125% on the mortgage – so always be prepared.
Then there's the risk of all property purchase, that the value of the property could fall as well as rise, and you need to make certain you understand the yield potential of the property too. And what about when mortgage rates start to increase? Consider the likes of stamp duty and capital gains tax when you come to sell the property too – it can all add up!
Is it for me?
If you've done the necessary research, are comfortable with the risks and have the funds there to make BTL a viable investment, there's no reason why it couldn't be an option to consider. Just make sure you understand the process inside out before you take the plunge and have your finances firmly in order – not only do you need to find the right BTL mortgage, but you need to be prepared for the likes of maintenance costs, insurances and void periods too – and if you do, BTL could well be a viable way to provide at least part of your income throughout retirement.
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Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.
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