Can I draw out my pension and buy a rental property?

The short answer to this question is yes. Essentially, anybody over the age of 55 can access their pension pot and therefore if you wish to purchase a rental property, you are inclined to do so. 

The issue comes when you decide whether this is actually something that’s going to be suitable for you to do, after you take into account your personal circumstances. There are also large tax implications involved with drawing out your pension funds to buy a rental home, which can make the proposition unattractive.

How do you purchase a property with your pension fund? 

Let’s say you have a set amount in your pension fund that you want to use to spend on a rental property. 

As a first step, it’s a good idea to establish whether the money you have available to you is going to be enough to buy something in the area you desire. You also need to consider the other costs that you incur when you buy a house; such as solicitors, mortgages and stamp duty. 

For example, let’s say you are cash buying a rental property. You will need to consider the likes of solicitors fees and you will also have to pay a stamp duty surcharge, which is levered on any property that you’re buying to let out or any second property and is 3% of the purchase price:

  • Let’s say the property you’re looking to buy is priced at £105k
  • Solicitors fees for this are likely to be around £1200k
  • Stamp duty would be £3,150k (3% of the property price) 
  • Total costs would be £4,350k

With the above example taken into consideration, it’s important you ensure you draw enough from your pension pot to cover the additional costs alongside the amount it’s going to cost you to purchase the property in the first place. 

What return will you get from your rental property?

If you’re drawing money from your pension pot to spend on a rental property, you want to ensure it’s going to provide you with a healthy return to make it a worthwhile investment. How much return you get will largely depend on the area your rental property is situated.

You also need to consider costs if you decide to use a letting agent to rent the property out, which is usually around 8-10% of the rent you charge your tenants each month. You will also need to ensure any maintenance costs are covered with the property and that you also have sufficient buildings insurance in place to ensure your property is protected.

What income should you expect if you don’t take the funds from your pension? 

With any pension pot, you can withdraw a certain amount as a tax free, lump sum. Once this has been withdrawn, you can use the money you’re left with to generate an income. 

This can be done through two main routes; an annuity or a drawdown. 

An annuity gives you a guaranteed income for life, but it does mean you have no access to your capital. With a drawdown, your income isn’t guaranteed but you still have access to the capital and any unused funds you haven’t drawn upon can be passed on. 

Is it a good idea to use your pension to purchase a buy to let property? 

Your pension is so heavily taxed when you withdraw it and you then have to pay tax on the rental income – so depending on your personal financial position it’s not necessarily the most tax efficient way to get your pension to work for you. 

Property is a great investment to have in your portfolio, but we believe it should compliment your pension fund rather than strip it out entirely. 

Why do people value a property purchase more than their pensions? 

We believe people feel that they understand property a lot more and it’s a tangible investment they can make, whereas with pensions, people can feel a bit more out of control. Generally,  pensions are made up of a mixture of investments that tend to be linked to the stock market – which people deem risky and complex. 

Pensions are deemed as higher risk because their value can fluctuate day to day. Whereas with property, although the value can increase or decrease, this generally happens over a prolonged period of time. 

People see property as a safer investment but you can also stumble across a lot of risk, such as not actually receiving any rental income and spending the money you’re earning from the rent to maintain the property building. 

You could achieve the best of both worlds and purchase a buy to let property using your pension pot, but doing so by withdrawing your tax free amount from your pension and using this to put down a deposit on a buy to let mortgage. This way, you are retaining the rest of your pension pot that provides you with an income, while potentially generating another income through a rental property using your tax free lump sum.

How Do We Help?

As part of our Wealth Management services, we can assist in building you a Bespoke Retirement Plan, whether your just starting out, or trying to make sense of your existing position, we will work with you, to establish the income you need and what you need to do to achieve your required goals. 

We offer an initial meeting at our cost, to complete an overview of your current position, and establish what work and research is required, detailing clearly costs involved if you want us to provide you with a recommendation, and go onto implement our advice, and become a client.  On becoming a client, we will then keep track of your retirement plan, by managing your pensions or investments through regular contact and annual reviews

 

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