This post was last updated on August 19th, 2021 at 04:34 pm
Whether you’re already receiving your pension or you’re approaching pension age, it is good to review the different options available to you. One option that many pensioners overlook is turning pensions into property.
Buy to let property purchases offer the ability to bring in rental income, meaning they could provide growth over your pension.
How can pensions be transferred?
There are a few ways to invest your pension in buy to let properties. With new legislation effective from April 2015, you can transfer a percentage of your pension to your personal bank account tax free. This money can be used for a deposit or even outright purchase of a property. Whether you cash out the tax-free part of your pension or pay taxes on a larger transfer, the benefits of rental property ownership could outweigh the potential costs.
Pensions can also be used for property purchases through a self-invested personal pension (SIPP), but there are some conditions. While you generally cannot use a SIPP to purchase residential property, it can be used to invest in a fund that manages a portfolio of residential properties. You could use a SIPP to invest in an existing property fund or work with others to pool your pensions and create an investment fund.
Individuals who already own buy to let properties can also transfer their individually owned properties, which are subject to tax, into an investment fund. This move allows pensioners to take advantage of new pension taxation rules. The transfer from property to shares is a way to reduce your annual tax bill significantly.
What are the benefits and risks?
Whether purchasing property in the UK or overseas, there is always inherent risk. The value of property may go down for a variety of reasons. This could leave you with negative equity.
Buy to let properties only offer profit when they are being rented out. For individual owners, although able to keep their letting fees down by using an online letting agent, they will still need to shoulder the costs of any required repairs, and as well as paying any costs for times when the property is empty. For UK properties, this might be while looking for a tenant, whilst overseas holiday properties might have off seasons.
When investing in properties as an individual, there is the possibility that you will pay a higher amount of tax than you would if you were to keep your money in an ISA or other traditional pension account. Over years, this could add up to a significant amount.
However, there are plenty of benefits available, too. If you transfer your pension to a property, it can give you added control over your savings. You can look for a property that is likely to gain value over time, potentially giving you a dividend when you sell it.
By purchasing property through an investment fund, you can also protect your investment. The reduction of taxes could mean that you are left with a higher gain than you would have with other investment types.
In many cases, it comes down to the amount of time put into research. By carefully considering the amount you withdraw from your pension, how you withdraw it, and how you reinvest it, it is possible to avoid the most common pitfall – high taxation – of a pension transfer to property.
Property is traditionally a stable investment, and it can offer protection from some market volatility. In this respect, it might offer a more stable option than stock market investing. However, this again comes down to research. As with any property purchase, it is important to buy at the right time and at the right price.
While many pensioners have already made the move to property ownership, it is likely that there will be more looking for buy to let opportunities given the new pension rules. Just as more pensioners will be turning to the property market, there are plenty of attractive individual and fund purchases to be made both in the UK and overseas. Time will tell, however, if buy to let property purchases made in retirement create a new economic boom for the UK’s pensioners. As with any pension investment, it is one option that may not be for everyone, but that may be perfect for some.
Have your say:
Are you planning on transferring your pension into property? Do you have any hints or tips for our readers? Please share your comments below. Thank you.