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Should you turn your pension into property?

Should you turn your pension into property?

Category: Retirement

Updated: 18/09/2015
First Published: 18/09/2015

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

The launch of the pension freedoms in April unlocked the potential of people's pension savings, giving them a wealth of new options and opportunities with how to spend their pot. For some, the ability to cash in their pension and withdraw it as a lump sum opens up the possibility of investing in property, more specifically buy-to-let. The booming rental market and the continuing pressure on the housing market make this seem like a fool-proof option for securing a retirement income – but is it?

The advantages of bricks and mortar

Retirees looking to secure an income for a comfortable retirement have to face facts: both savings rates and annuity rates leave a lot to be desired, and our latest research shows that retirement incomes took a further hit in the last year. To make the most of all those years of hard saving, it is therefore little wonder that more and more people are turning to bricks and mortar to secure themselves a living in retirement.

Buy-to-let investment in particular has a great deal of appeal – the Private Rental Sector (PRS) is continuing to grow, and rents are edging up year-on-year. Indeed, the Buy-to-Let Index of Reeds Rains and Your Move recently revealed that rents in August had risen by 5.5% over the year, putting the average rent in England & Wales at an eye-watering £803 per month.

These rental prices, combined with the capital gain made from increasing house prices, mean that the potential gross yield for landlords is highly attractive: according to the Index, gross annual yields for landlords in England & Wales stood at an average of £16,856 in August, before mortgage payments and maintenance costs were considered.

It's surely a win-win situation then? Well, not quite.

Although the figure of £16,856 is certainly an enticing one, it must be remembered that the costs of being a landlord will eat into this figure. Insurance, agency fees (if using) and the costs of maintaining a property, not to mention the risk of void periods, can all have an impact on the profitability of a property and should be weighed up carefully before making an investment. It is also worth bearing in mind the location of your rental property: not all markets are as lucrative as others, so it's important to do your research.

Finally, the latest Budget dealt would-be landlords a blow in the form of changes to their tax relief. You can find out more about the changes by reading our article, but essentially they mean that the amount of tax relief landlords can claim will be gradually reduced, starting from 2017.

It is also important to consider the cost of withdrawing a large sum of money from your pension. Up to 25% of your pension can be withdrawn tax-free, but after this, your money will be taxed according to your marginal rate. If not prepared for, this can be an unexpectedly large cost – could you be prepared to give 20, 40 or even 45% of the remaining lump sum to the taxman?

Get advice

Of course, this is not to say that being a landlord cannot be a highly lucrative business, but it does mean that it's important to weigh everything up before you start searching for the perfect rental property.

Independent financial advice can help you to find out whether investing in property using your pension can provide the kind of returns you would need for a decent retirement income. Advice can also help you to weigh up the advantages and disadvantages of other income options, such as income drawdown and annuities.

If you do decide to go ahead, make sure you get the best buy-to-let mortgage deal possible to keep your repayments in check – take a look at our buy-to-let best buys to see if you can find the right mortgage for you and your buy-to-let ambitions.

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.