Retirees who are tempted to invest their pension pot in property need to think carefully of the tax implications, warned Tony Mudd, divisional director for tax and technical support at St James’s Place.
As residential property cannot be held in a pension, people purchasing a property will need to draw the required sum from the fund, he pointed out.
Those who withdraw £100,000 will pay income tax of £19,403; for a £200,000 withdrawal this increases to £53,643 and for £500,000 savers will pay £154,893.
“The new rules make it possible to withdraw the whole fund, with 25 per cent available tax-free but with further amounts taxed at the individual’s marginal rate of income tax,” explained Mr Mudd.
“People taking a large withdrawal could therefore find much of it, along with any other income for that year, taxed at the higher 40 per cent rate, or the top rate of 45 per cent.
He stated that the rental income achieved from the net proceeds invested in a buy-to-let property, and the yield needed to achieve the same level of income if the whole fund remained invested in a pension, made buy-to-let far less appealing than it first appears.
Mr Mudd also warned if the value of the buy-to-let property rises sufficiently, it would be liable for capital gains tax when sold, while any property owned by the individual forms part of their estate for inheritance tax purposes.
“Wealth held in a pension fund is remarkably tax-efficient for those who choose to keep it there. Investments are not liable to capital gains tax while they are in a pension, regardless of how much they grow; and if an income is required from the pension, you can take flexible payments through the newly created ‘flexi-access drawdown’ facility.
“This allows income to be drawn at a rate that suits you, or that you determine to be the most tax-efficient, whereas property counts towards the value of your estate for inheritance tax purposes, pensions do not.
Mr Mudd added that a pension can even be passed on to beneficiaries tax-free if an individual dies before age 75. “If death is later than this, income from the inherited pension is taxed at no higher than your beneficiary’s marginal rate of income tax.”
The warning follows research last month which showed that 53 per cent of retirement savers say they would consider investing or are already investing in buy-to-let to increase their income in retirement,
Research from specialist mortgage lender Kensington found that 8 per cent of are already investing in buy-to-let while another 45 per cent said they would consider it.
There have been several suggestions that the new pension freedoms will spark a buy-to-let boom.
FTAdviser reported in February that advisers and estate agents had acknowledged this could be the case, however many claim the scale of the likely investment is being overblown, as not many people have a large enough pension pot.
emma.hughes@ft.com
