Sweeping changes to proposed pension rules in March (see previous blogs) have seen some older savers react with cavalier spontaneity.
I’ve noticed a sudden enthusiasm for buying buy to let property with pension pots – which could be taken and used more or less, as you please, based on the new pension regime.
The Sunday Times (13th April 2014) featured an article about an Oxfordshire Bus Company that specialises in trips to view Buy to Lets. Since the pension changes they have seen a significant upturn in their bookings – with individuals believing they’ve spotted – pardon the pun – a bandwagon.
But my advice is to look before you leap: Buying property outright using your pension fund may not be tax efficient: You’ll pay income tax on everything but the first 25% of the pension pot that you use to buy the property. This might mean a tax charge of between 20% to 45% depending on the size of the pension fund. You could be liable for Stamp Duty as well as legal costs and valuation fees. You will also pay income tax on the rental income from the property. If and when you come to sell it, you will be potentially liable to Capital Gains Tax. Lastly it is an asset that will form part of your estate, and so could attract a 40% tax charge.
That’s quite a lot of tax isn’t it? But you might be surprised at how many people are viewing this as a mini goldrush. The only person who should take this view in my option is The Chancellor, as the tax revenues for him could be significant, as I’ve demonstrated.
If most of these people had been better informed, they would have probably have been given other options. We are Lifestyle Financial Planners and use a Cashflow Modelling Tool, to help us put exact numbers against assets & liabilities to scope dates and income for the future. This allows us to offer very specific advice tailored to the individual’s needs.
It’s hard to be specific in the case of the Buy to Let goldrush in the terms of an alternative, as all solutions should be based on individual circumstances BUT…
There are a number of ways of investing in property more efficiently without encashing your pension fund and I will deal with those in another blog, soon. But the wider question might focus on whether Buy to Let property is the right choice anyway. I’m not going to come down either side of the coin on this one, but I will point out that as house prices are rising, will rental incomes keep pace? We could arrive at a situation of an oversupply of Buy to Let properties with rental incomes being forced down due to supply and demand with many owners perhaps struggling to find tenants.
If by this stage of my blog, you feel a bit overwhelmed with the numbers, don’t worry. It’s the principle and the human story that I’m more interested in. Retirement planning is not about quick wins or goldrushes, it about working out your own numbers and then taking balanced approach across the asset classes. In doing that you minimise exposure in the event of sudden dips in property or stocks and shares and – with proper advice on your journey – you can manage a sensible road to retirement without having to jump on any passing bandwagons.
John.