What you need to know about using a pension to buy property
If, like many people, you are interested in using money from your pension to buy property then this page is for you. It explores the costs and risks, and covers other key things to consider before making any decisions.
The headline facts at a glance
If you’re thinking of using your pension to purchase a second home then the main risk is losing some or all of your pension and the income it would provide. Of course, you may be confident that other sources of income could more than make up for this loss.
On the other hand, if you’re thinking of buying a property as an investment then there are a number of things to consider including the potential for its value to fall and the various taxes, fees and charges that need to be paid. Also, the government has recently made changes that could make investing in property less attractive.
To begin with, let’s take a look at what it could cost you to get started as a property investor.
What are the costs?
If you are thinking of making a large withdrawal from your pension, the first thing to consider is your tax bill. You can take a quarter of your pension tax free. After that, the rest is treated as income which means the taxman could end up with a big chunk of your money. If you already own a house then stamp duty on any additional property will be 3% higher, which on a £200,000 house would add an extra £6,000 to the bill. There are also the usual legal fees and other associated costs with buying a house. Once it’s all paid for, you will need a huge increase in the property’s price just to get back what you took from your pension.
There is even more to think about if you are looking to buy a property to rent out. You would pay tax on the rental income you collect, and up to 15% of that income could be paid to a lettings agency to handle maintenance, repairs and arrears chasing. That’s a lot to think about even before we consider the risks…
What are the risks?
Your pension: Taking money out of your pension will reduce the income it can provide. And if you take it all and don’t have other sources of income, you might not have enough money to live on when you retire. These are savings that you have built up over many years and they should not be given up lightly.
As a landlord: Two of the biggest risks you could face are time without tenants and unpaid rent. Also, recent changes by the government – such as increasing stamp duty – may make investing in property less appealing. It is possible they will make more changes in the future that could further reduce any potential profits.
Your future plans: Most pensions can be passed on to a loved one, in some cases completely tax free. Because of the way estates are managed, your property may need to be sold to pay for inheritance tax and other costs, which may mean there is nothing left to pass on.
Would your eggs all be in one basket?
Money held in a pension is usually spread across a range of investments to reduce the risk, and this range can include property, shares, bonds and cash. The opposite happens when you put your money into property: you are betting on one investment doing well. What if the housing market crashes? You could lose a lot of money. Also, your money is tied up in the property until you sell it. Not only can that be a long and expensive process, it can leave you with a loss if you are forced to sell when prices have dropped.
Taking money from your pension is a big decision with potentially very large tax implications. What you then do with that money can be equally important, and there is a lot to think about. That is why it is best to talk to a regulated financial adviser first.
We have included answers to some of the most common questions that are asked below.
Can I hold property in my pension?
Yes, in fact there is a good chance that your pension already includes some property investment. It is generally seen as a safer way to invest your savings than the stock market, and spreading your money across different investments lowers the risks.
Are pensions more tax efficient than property?
Pensions are probably the most tax efficient way to save money. Not only is there tax relief on contributions, you are not taxed on any growth and you can take a quarter of your pot tax free from the age of 55. Property does not offer any of these tax advantages. There is stamp duty to pay upfront and capital gains tax if you make enough profit when you sell. And if you are a landlord, you will be charged income tax on the rent you collect.
Is property safer than a pension?
Not generally, because with a pension your money is invested in different places. While some investments may underperform, others may perform very well. This reduces the risk of losing money while making it more likely that your fund will grow. You can also choose how safe investments in your pension are, which is not an option with property. When you take money out of your pension to buy property you are putting everything on a single bet, leaving you to worry about everything from tenants moving out to a price crash.
Important Information, References and Links
A quick reminder that the tax you pay depends very much on the current rules and your personal circumstances, and so could change in the future.