Pension versus Property

Is now the time to invest in property?

Luke Wilkinson

From April 6th 2015, over-55s have the ability to withdraw the whole of their pension and invest in what they wish in retirement. But should retirees and pension holders continue to trust their pension pot, or should they now start to rely on bricks and mortar?

Savers have always had the freedom to withdraw up to 25% of their pension in a tax-free lump sum but, now they can withdraw the whole amount in a number of smaller lumps with 25% still being tax-free. This will largely benefit savers with a relatively substantial pension pot.

Growth in house prices and rewarding buy-to-let yields, as well as the recent stamp duty changes, are making this a tempting option for many. Low pension rates and excessive charges continue to undermine the chances of getting an income from pensions.

When looking long term, property prices have always gone up. Even through economic recession, when house prices fall, they have historically always returned to their original price and risen, often drastically, even more. When the market takes a dive it has always been short-term but this in turn increases rental tenant demand increasing rental income.

Average House Prices

It comes as no surprise that people are looking for alternative options to the volatile stock market-linked pension funds. The below chart shows a person with a £40,000 retirement fund invested for 30 years. The advantage of investing in property means that you can buy an asset worth more money than you invest. This is known as a geared investment. Even if the rental income just covers the mortgage, void periods, maintenance and management costs, property investment still comes out on top.

You could only access this money through selling the property and you would be subject to Capital Gains Tax (CGT), but this is still a far more lucrative option than the 4% per annum pension fund.

 Pensions       Property


Not Just a Short Term Investment

If you're only looking short term, property prices may decrease and if wanting to sell, the market could take a dive and you may not be able to get the price you want. The ongoing costs, as well as estate agency and mortgage fees, make it an expensive short term solution.

The advantages of a pension are employer contributions and tax relief. If you're lucky enough for your employer to match your pension fund you could be looking at high yields on your investment. Someone earning more than £44,000 pa could also get 40% tax relief on pension contributions.

With property, if you are a higher-rate taxpayer, you are going to have to pay income tax at your highest rate on any rental income and CGT on any sale. With a pension, you are currently able to withdraw 25% of the fund in a tax-free lump sum. From April 2015, retirees will have a great deal more freedom to use their pension funds as they wish, reducing from a 55% tax rate for withdrawals above 25% to the pensioner's personal income tax rate.

On the flipside, this will no doubt increase buy-to-let sales with retirees but investors need to be aware of the risks and tax implications. People can take their money out and purchase property with either a percentage deposit or cash depending on their circumstances. This could allow retirees to generate an income during retirement and may well give the UK property market a dramatic new lease of life this spring.

Don't withdraw all at once

If you are looking using to use your pension towards a buy-to-let investment, it should act as support to your pension and not be the only option.

A sensible way to release equity from your pension is gradually over a period of time. Withdrawing your pension slowly will minimise the tax paid. For example, if you have a £200,000 pot, you could cash it in from April 2015 and have £50,000 tax-free, but the remaining £150,000 would be liable for 40% tax - as much as £53,600.

Pension Freedom

If the person decides to take the pension instead in £50,000 lump sums each year for four years, then each year they will receive £12,500 tax-free and be liable for income tax only on the remaining £37,500, which could be as low as £5,500. So instead of paying more than £50,000 in tax, the person pays around £22,000.

Tax Relief-2
Tax Relief
Tax Relief-3
Tax Relief-4

Balanced Portfolio

Very few people take independent professional advice when considering buy-to-let. Be sure you know the pitfalls and don't put all your eggs in one basket. Create a diversified portfolio of a variety of assets to spread the investment risk and speak to one of our advisers about creating a balanced portfolio.

Many of us are now extremely keen on creating or expanding property portfolios to fund a comfortable retirement. Just make sure you fully understand the implications of income tax, capital gains tax and inheritance tax. If not properly financed, it could mean that the rental property does not provide the desired income for retirement and it could one day also impact the fortunes of beneficiaries when the estate is valued for inheritance.

So if you are over 55 and you want to take out some of your pension, you have the decision to either spend it on an all-inclusive round the world cruise or a savvy buy-to-let investment portfolio to see you through your later years.



Download our Buy-to-Let Guide
Next Article
subscribe to view our stock


Risk Warning and Disclaimer:

The price of property can go down as well as up. Historic performance should not be taken as a guarantee of future performance. Geared property investment with mortgages can increase risk of losing money as well as increasing the possible gains. Mortgage products referred to in the website can be withdrawn by the lender or have rates or other terms changed without notice and reference to any products does not imply they are certain to be available in the future. Mortgages referred to may also have certain applicant restrictions and are for indicative purposes only although reasonable endeavours have been used to ensure that they are available at the time of publication and are applicable to a significant number of our purchasers. This site is for information purposes only and nothing on this site should be taken as definitive investment advice for your particular situation without you seeking additional guidance directly from ourselves or from other finance and property professionals. Property particulars on this site do not form part of an offer or contract. The developer and Assetz Property Ltd, whilst endeavouring to ensure complete accuracy in these property particulars, cannot accept liability for any errors. Valuations of property or indicated rents achievable are either estimated or derived from valuations and/or comparables and can change and should not be relied upon without your own additional valuation and research, but we have carried out reasonable endeavours to achieve accurate indications for these figures. All descriptions, dimensions, areas, reference to condition and, if necessary, permissions for use and occupation and their details, are given in good faith as provided by the developer and are believed to be correct. However, these are subject to change, especially, but not wholly, relating to any property that is off-plan or not yet complete. Any intending purchaser should not rely on them as statements or representations of fact but must satisfy themselves by inspection or otherwise as to their accuracy. The onus is on each individual investor to undertake their own due diligence, enquiries and inspections. Where shown, net yields are calculated as rental income less expected service charges less expected ground rent as a percentage of the property price. No void periods, optional letting agent costs, repairs or other costs are deducted. Our standard Terms and Conditions of Sale will apply. E. & O. E.