I have nothing against buy-to-let, but….

Ahead of the 'pensions rush' Fiona Tait, Business development manager at Royal London, shares her views on cashing in pensions to pursue buy-to-let

With the ability to withdraw the total value of a pension in cash almost a reality, I've become really concerned at the number of people (including many who should know better) who are intending to cash in their pension funds and invest the proceeds in property.

As I say above, I've nothing against buy-to-let. It's a legitimate investment strategy and some people are bound to prefer it to investing in a pension. My problem is with the plan to use money which is already invested in a pension plan.

Basically, if you choose to take your money out of one investment – any investment – and invest it in another you would want the second investment to at least have the potential to provide a better return over and above the costs of investing.

Anyone who withdraws enough money from a pension to purchase a property will have to pay a significant amount of income tax on the withdrawal. They may then pay stamp duty on the property purchase, income tax on any rental income and capital gains tax on any growth in value:

Here's an example:

A 65-year-old has a DC pension pot of £400,000.

  • This means that before the client makes any return on their investment the property would have to achieve an investment return of around 40%.
  • In addition, any income from the property in this tax year would be subject to tax at 45%.

Last but not least, the client would be moving their money from what is effectively an instant-access savings account into one where they could only access their investment after a protracted sales process.

If a client wants to invest in property using their pension money they can select a property fund, or at least limit their investment to the amount they can withdraw tax-free.

To find out more about how Royal London can help you and your clients with the new era of retirement planning visit our dedicated ‘Retirement is changing’ page on our website.

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