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Pension or property: why more savers are choosing buy to let

POSTED: 23rd February 2015 IN: Personal Guides
Invest in a Buy to Let mortgage

Invest in a Buy to Let mortgage

Thanks to the introduction of ‘Pension Freedom’ reforms, over 55s will soon be able to access all of their savings for old age in one go.

undefinedThanks to the introduction of ‘Pension Freedom’ reforms, over 55s will soon be able to access all of their savings for old age in one go. 

As a result, more than one in 10 retirees plan to withdraw their pension as soon as possible, and 16 per cent of these want to use the money to invest in property.

But while buy-to-let can be a lucrative investment, retirees must ask themselves whether the associated benefits outweigh the amount of time, effort and risk that is required.

What is ‘Pension Freedom’?

From April, the new pension reforms will give retirees more choice over how they spend, save or invest their money by giving them the opportunity to withdraw all their savings at once.

While many may continue to use annuities, for a number of retirees the reforms are a welcome amendment that will give them the flexibility they need to improve the money they have saved during their working life. For some, investing their money in property will boost their monthly income and allow them to continue to enjoy the standard of living that they are used to. For others, such an investment can help them to support their family financially if they wish.

Why invest in property?

Growth in house prices and generous buy-to-let yields have made property investment an appealing option for many. According to an exclusive poll by The Observer, one in three are ditching their pension pots altogether and relying on property to fund their retirement. A third of these said they’d live on income generated from buy-to-let properties, while more than half said they would sell their own home and use the money to pay for their retirement.

For those who have saved throughout their working lives into a pension scheme and are looking for ways to maximise their savings, tying their money into property could prove beneficial.

Property versus annuity

Most retirees use their pension savings to buy an annuity to provide them with a yearly income. However, income entitlement is largely based on life expectancy, meaning that some pensioners may miss out on a portion of their savings.

Some favour the rate of income from rent over annuities or other types of investment such as stocks and shares, as it can be a less volatile capital investment and is not often subject to fluctuations. At present, gross yields currently average 4.2 per cent across Britain, making this especially attractive to those investors who are willing to take a more ‘hands-on’ approach.

However, with these gross yields overlooking tax, mortgage repayments and maintenance costs, potential investors are being warned to do their research before they lock their money away in bricks and mortar. As with any investment, buy-to-let is not without its risks. While there could be a potentially large long-term boost if the property’s value appreciates, if the value drops, a lot of money can be lost. 

Before embarking on a buy-to-let project, it’s vital that investors have strong finances so that they are prepared for all the hidden costs associated with running a rental property. It’s also important to research the properties that you are considering investing in, to ensure you can grow your money.

Landlord and owner of Letting Focus, David Lawrenson, says: “I think landlords need to be a bit more clued up before they start to invest. Make sure you do plenty of research and know the market. But in an area with a strong tenant demand, be competitive and don’t overcharge for the property. It’s a great investment if you treat the tenants well and manage the business properly. You’ve got to put the time in to see a return.”

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Tax considerations

The buy-to-let market is particularly attractive when interest rates are low and stocks are unstable, but with speculation that interest rates may rise in 2015, potential investors should ensure that they are prepared for a hike in mortgage repayments.

Perhaps the biggest consideration for pensioners taking the leap into the world of buy-to-let is the percentage of income that will be taken by the taxman.

Pensions come with many tax advantages including exemption from capital gains tax (CGT) on the sale of assets inside the pension. But once funds are removed from a pension and placed in an asset liable to CGT, the investor is at a disadvantage.

Over-55s are currently charged 55 per cent tax if they withdraw their whole pension pot. But as a result of the reforms, 25 per cent of each lump sum withdrawn will be tax-free, while the rest is taxed at the marginal rate. While those who retire from April onwards will be able to keep more of their pension than those before them, many may still be put off by the amount of tax they are expected to pay.

The practicalities of being a landlord

The monetary benefits associated with buy-to-let may attract those with an interest in boosting their pension pot, but the practicalities of being a landlord must be considered.

There are pitfalls to locking all your money in property. While house prices may seem healthy, there are no guarantees. If prices were to fall, investors may find themselves in negative equity.

When purchasing a buy-to-let property, there are also transaction costs such as stamp duty, legal fees and estate agent fees to consider.

Of course, the charges don’t end once the property has been bought. Tenants require regular attention and maintenance costs and repairs will have to be taken into account. If tenants have not been properly vetted before moving in, landlords could run into problems such as failed rental payments or property damage.

David Lawrenson believes that often, new property investors consider how much money they’ll need, but they overlook just how much time being a landlord takes. He says: “I think people underestimate how much time this can take more than they underestimate the money. You need to register tenants on the deposit scheme, you need to maintain communication with your tenants and keep up with repairs and maintenance. A lot of admin is required and this all takes time and time is money.”

Any vacant periods in between tenancies can seriously impact returns, and if the property is a House in Multiple Occupation, landlords must abide by a wealth of licensing regulations or risk substantial fines.

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Pension advantages

Of course, while some people choose to sacrifice a pension scheme altogether in order to invest their money in property much earlier on in their lives, it could be said that retirees who draw their savings at the age of 55 have benefitted from the best of both worlds.

They will have already enjoyed employer contributions and tax relief, and by investing in property aged 55 they can make the most of rental yields and potentially boost their income.

While property investment can be lucrative for many, retirees need to do their sums in order to ensure that it is worthwhile for them. Not only are there various tax rules to consider, the endless running around often associated with being a landlord may chip away at the new found freedom of retirement. A buy-to-let is not to be taken lightly and can involve lots of planning and paperwork.

Pensioners will also need to prove that they are worthy borrowers in order to secure a buy-to-let mortgage. While some lenders have age restrictions, there are others who are willing to lend to older borrowers providing they can prove that they will be able to meet mortgage repayments. For more information about buy-to-let mortgages, please get in touch with the team.

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