The ability to withdraw the total value of a pension in cash is now a reality. I am really concerned that pension holders may be intending to cash-in their pension funds and for example, invest the proceeds in property.
I have nothing against buy-to-let. It’s a legitimate investment strategy and some people are bound to prefer it to investing in a pension. My problem is with the plan to use money which is already invested in a pension plan.
Basically, if you choose to take your money out of one investment – any investment – and invest it in another you would want the second investment to at least have the potential to provide a better return over and above the costs of investing.
Using Your Pension Pot To Buy A Property
Anyone who withdraws enough money from a pension to purchase a property will have to pay a significant amount of income tax on the withdrawal. They may then pay stamp duty on the property purchase, income tax on any rental income and capital gains tax on any growth in value:
Here’s an example
A 65 year-old has a DC pension pot of £400,000.
| Tax Rate | Income Level | Tax Paid | Received |
|---|---|---|---|
| £100,000 tax free | £278,857.85 | ||
| Personal allowance
20% 40% 45% Total |
£0
£31,785 £31,786-£150,000 £150,001-£300,000 |
£6,357
£47,285.60 £67,499.55 £121,142.15 |
|
| Net income | £178,857.85 |
This means that, before the client makes any return on their investment the property would have to achieve an investment return of around 40%.
In addition, any income from the property in this tax year would be subject to tax at 45%.
Last but not least, the client would be moving their money from what is effectively an instant-access savings account into one where they could only access their investment after a protracted sales process.
If a client wants to invest in property using their pension money they can select a property fund, invest in a commercial property within the pension or at least limit their investment to the amount they can withdraw tax-free.
