Should I invest in a buy-to-let pension?
Many property investors and landlords have always seen their buy-to-let property portfolio as their pension. The changes in the pension legislation has allowed pensioners to draw down part of their pension as a tax free lump sum suitable as the deposit for a buy-to-let investment. Is buy-to-let a suitable replacement or addition as a buy-to-let pension or are pensioners better off putting their money else where perhaps by investing in a holiday let?
How to invest in a buy-to-let pension?
The first thing to point out is in essence that there is no such thing as a buy-to-let pension. As it stands an investor cannot put a directly owned residential property inside a pension wrapper and obtain all the tax advantages available through a personal pension. It is possible to own a commercial property in your Self Invested Personal Pension (SIPP) however as I know to my cost the buying and then subsequent ownership of property in a SIPP is not straightforward.
The way really to use a buy-to-let property investment as a pension is as many landlords have done through the decades it to buy a residential property to rent out with a repayment mortgage and use a tenants rent to pay down the mortgage so that at the end of the mortgage term say 20 years you own the property outright and as the landlord you can either consider selling your investment property or continue renting it out and utilise the rent as part of your pension. SIMPLES! Unlike with a personal pension you will pay tax both on the rental income and capital gains on disposal
Using your pension to invest in buy-to-let
The other way of using your pension is to utilise the tax free lump sum from your pension pot as the basis for a deposit to purchase a buy-to-let. You should before you do any of this understand the risks of buy-to-let investment.
The changes in the personal pension came into effect on the 6th April 2015 and now allow many pensioners to take part of their pension as a tax free lump sum or draw down their capital over time. This potentially enables many of them to raise at least the deposit to go and purchase an investment property for the first time. Many commentators have being talking about a stampede of pensioners into buy-to-let. We have therefore decided to examine some of the advantages and disadvantages for some one with a pension investing it in a buy-to-let property.
Five reasons why pensioners should invest in a buy-to-let pension
1. Buy-to-let can provide a steady income from residential rents and the benefit of potential capital lift over time as hopefully house prices continue to rise above the rate of inflation. The long-term increase above inflation according to the Nationwide has been 2.3%.
2. Landlords buying an investment property can gear their property. That means they can borrow more money than they are able to or are prepared to invest. The upside of this is that should house prices rise then their return on their initial capital will be much greater. For example: a lump sum of £25,000 invested as a deposit for a £100,000 property with a £75,000 loan. Say the net yield on the property was 5% or £5,000 per year. The gross annual return on the initial capital sum (your deposit) would be a massive 20%. If property prices rose a modest £25,000 over 10 years or just 2.5% the return on the investors initial capital would be 100% on the capital alone. These are the types of figures that attract many buy-to-let investors including pensioners to this asset class.
3. The capital value of residential property has a relatively low level of volatility compared to for instance investing in an individual share or the stock market. Prices do fall but historically rarely fall in actual terms particularly over the longer-term. Residential property has an intrinsic value which means that it’s value is always protected. This means that pensioners where investing horizons are relatively short are exposed to a relatively low likelihood of a capital loss.
4. Residential property and rents tend to increase in line with costs of living and inflation which means that this class of investment and the income derived from it keeps track with inflation and prevents the devaluation of the investment and the subsequent investment stream.
5. Buy-to-let is a great little retirement business. You have the control of running your own small business but without the constant demands on your time and energy that running a full time trading business involves. As I know renting out property still gives you plenty of time for those all important holidays & breaks. Perfect for globe trotting pensioners.
5 reasons why pensioners shouldn’t invest in buy-to-let
1. Retirement means less not added responsibility. Renting out property means EPC, probably a Gas Safety Certificate, tenants constantly wanting things fixed and potential problems with tenants not paying the rent. Do you need this in your retirement?
2. Many pensioners who own their own residential property will already be overly exposed to residential property as an asset class. They should look to diversify their investment portfolio rather than concentrating more resources in one class of investment.
3. Both income and capital appreciation from buy-to-let property is taxable. Property investment could add additional tax liability to an investor giving rise to a tax time bomb.
4. Whilst there is now an opportunity to borrow money following retirement to buy a rental property. There is only a limited number of lenders and rates for borrowers wishing to borrow past their seventies.
5. Property investment is a ‘lumpy’ investment where it is only possible to release capital from it on the sale of the entire investment.
Investing in a buy-to-let pension conclusions
You can see that there are pros and cons of why pensioners should consider a buy-to-let pension. It’s not clear cut. However, given that many people are looking to retire at a relatively young age (from their 50s) and that life expectancy is increasing at a breathtaking rate. Those in there 50s now may be looking at another 40 years of life and providing for themselves during that time. A buy-to-let property gives pensioners an income producing asset that is ideally aligned to providing during their retirement years. Equally more retirees are looking for a bit of a challenge in their retirement years. A buy-to-let property post work could provide an interesting business challenge and meaningful retirement returns if managed correctly. It is all down to the attitude and aptitude of the individual. It’s not a panacea but pensioners need to give it serious consideration before deciding to take the plunge.
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