The changes to UK pensions legislation from April 2015 are leading to speculation in the media about a ‘tidal wave’ of buy to let property landlords, looking to use their pension ‘pot’ to purchase an investment property rather than an annuity. However, being able to do so does not mean it is the right strategy for everyone. For instance, you need a significant pension pot (we estimate £300,000+) to make it worthwhile.

If you are 55 and have a defined contribution pension, you can either take 25% of your pension tax-free in one lump sum or have 25% of any withdrawals made tax free. So, if you had a pension worth, for example, £320,000 you could either take £80,000 tax-free in one lump sum, with any subsequent drawdowns taxed as income, or make a series of withdrawals when convenient to you and receive 25% of each drawdown tax free (useful to help you manage your tax liability).

Any withdrawals above the tax-free amount will be taxed as income at your marginal rate. So, if you are a basic-rate (20%) taxpayer, any income you draw from your pension will be added to any other income you receive (e.g. your salary) and this could push you into the 40% or even 45% tax bracket. It is therefore essential to take independent pensions advice.

Once you have decided that investing in a buy to let property is the right strategy for you, make sure that you take specialist independent mortgage advice on how to finance your purchase. You need to be aware of both the tax implications of buy to let property purchase and the effect of gearing in boosting your returns.

Tax implications
As noted above, you are allowed to take 25% out of your pension fund tax-free, which is fine if you have a pot of £320,000, and need up to £80,000 as a deposit on a buy to let property. However, if the purchase requires extra cash to be withdrawn above 25% then income tax will be due on that additional amount. If you invest in a buy to let property and later sell it, you may also have to pay capital gains tax on any profits made from the sale.

Don’t forget the taxable nature of the net rental income, although that can be reduced by tax-deductible expenses of course. You should consult a qualified tax adviser or accountant about your own specific tax position.

Assuming that you do restrict yourself to using only the tax-free lump sum element as a deposit on a buy-to-let purchase, don’t forget to make sure that your strategy of property investment benefits from the effects of gearing.

Gearing
One of the main advantages of your buy to let investment will be that it will be ‘geared’. The table below illustrates, for example, that if you put down a 40% deposit on a BTL property, the returns on your geared investment will be 2.5 times more than if you owned the asset outright. These geared returns will then multiply over the years. A buy to let property can be an attractive way for an investor to grow their capital and protect against the risk of running out of cash. You should take professional advice from an independent financial adviser about developing a diversified portfolio of other assets to spread the investment risk.

Geared investment
(e.g. Buy to Let property) 
 Non-geared investment
(e.g. savings account)
Investment equity   £80,000  £80,000
 Mortgage  £120,000  £0
 Total investment  £200,000  £80,000
 Prices rise 10%    
 Asset value  £220,000  £88,000
 Mortgage outstanding  £120,000  £0
 Investment equity  £100,000  £88,000
 Investment return  25% (£20,000)  10% (£8,000)


Next steps

One challenge for older buy to let landlords is the difficulty of finding lenders willing to offer mortgages to borrowers of retirement age. However, although there has been much recent publicity about ‘ageism’ in the mortgage market, there are buy to let mortgage deals available to people past typical retirement age. You should consult a professional, experienced independent mortgage broker to find the right deal for you.

Private Finance

  • Established in 1999 Private Finance has successfully negotiated billions of pounds of mortgages. It is an independent mortgage broker whose mission is to exceed your expectations, working on your behalf to procure competitive terms and a suitable solution, quickly and efficiently.
  • Private Finance is not limited in the range of mortgages it will consider for clients. It is well respected by mainstream institutions and private banks, with which it has a reputation for introducing high quality clients. Its mortgage brokers are qualified professionals who understand and empathise with the needs of discerning individuals.
  • You can be assured that your mortgage will be competitively priced and well suited to your needs.
  • As a client of Private Finance your mortgage arrangements will be handled on a day to day basis by your dedicated broker. You will not have to deal with call centres or spend time providing personal information via online forms.
  • You are therefore free to get on with your life in the knowledge that your mortgage application is being managed proactively in order to meet important deadlines.
  • Our brokers take pride in helping clients fulfil their property aspirations and can often turn the seemingly impossible into reality! You may be able to look at a wider range of property than you previously expected and overcome obstacles which might have stood in the way of progress.

Email info@privatefinance.co.uk or call 0800 980 8777

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