Wednesday, 25 March 2015

Should You Use Your Pension to Fund a Buy to Let Purchase from 6th April 2015?

In last years Budget, George Osborne announced pension reforms that come into effect this April, which will give people with pensions unprecedented access to their pension pot and the freedom to look for alternatives. Many people connected with property investment are getting very excited about this!

In a nutshell, after the 6th of April, anyone aged over 55 will be allowed to withdraw all or part of their pension pot and spend it as they wish. Until now, you were only allowed to take out a quarter of it at most and were forced to buy an annuity with the rest

Giving people the freedom (and trust) to choose what to do with their money sounds great (and no doubt Ferrari dealers across the land will be rejoicing!) but aside from the fear that many people will blow the lot on a Supercar leaving a massive problem for some future Government to sort out, is it as good as it sounds from a personal retirement planning perspective?

First the Bad News - there are some hefty tax implications by taking money from your pension pot

As before, the first 25% can still be withdrawn from the pension pot tax free but, here is the sting in the tail, if you take more than a quarter of your pot anything above that initial 25% level will be taxed as income

So if you took the whole lot out, the first 25% will be tax free but the remaining 75% will be taxed at your income tax rate of 20%, 40% or even 45%

..and now the Good News!

Under the old scheme, if you bought an annuity, when you died your annuity normally died as well. You would have no asset to pass on to your family

With property, not only would you have an asset to pass on but it's highly likely that the asset would have increased in value 

The returns from pensions are pretty awful at the moment

The best rates according to Hargreaves and Lansdown state if you were 55 years old, the best rate you would get on your annuity pension would be 4.4% fixed for life or 2.2% but the payment would go up with inflation.  The sort of Buy to Let yields being achieved by well informed Landlords in Sunderland are in the order of 6% to 8%

According to the Office of National Statistics, the life expectancy of a 65 year old male in the Northeast is 17.8 years

Whilst there's no way of telling what's going to happen to property values in the future, instead if we roll the clock back 17 years 8 months to July 1997, property values in Sunderland have risen by 147% from an average £48,936 to £120,886 in December 2014 - would a pension achieve that sort of growth?

So what do you do next? If you think it may be something to consider you really must take independent financial advice from a qualified specialist before doing anything else 

I can put you in touch with Wealth Management experts who specialise in looking after the needs of Landlords if you need this independent advice - just drop me an email or give me a call 

If having taken that advice you do wish to release equity from your pension to fund a Buy to Let purchase you first need to think of the strategy you're going to take 

Do you look to achieve relatively small rental returns (low yields) in an up market area which has decent capital growth or alternatively buy properties in not so good areas known to produce a high returns (high yields) but low capital growth 

Or if funds allow perhaps spread the risk with one property likely to give good capital growth and another to return decent yields?

It's at this stage that I'd be delighted to share my knowledge of the Sunderland property market to ensure that any decisions were taken were informed decisions, giving insight into the areas and property types that are likely to make good long term investments...and those that won't!

Feel free to call into our Frederick Street office, give me a call on 0191 567 8577 or email if you want to chat about this or any aspect of property investment in Sunderland

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