Retirees seek to use pension cash as buy-to-let deposit

Retirees seek to use pension cash as buy-to-let deposit

Swaths of savers are set to cash in their pension pots to raise large deposits for buy-to-let property investments, which one property portal has said could be such a trend that it may drive prices up further at the low end of the market.

Rightmove stated that buy-to-let investors cashing in their pension pots to raise larger deposits may drive prices up further at the low end of the market, with agents reporting significant uplift in interest ahead of new pension rules in April.

Last month, advisers and estate agents acknowledged there could be a rush to buy-to-let property investment in April, although many claimed the scale is being overblown as few people have a large enough pension pot to meet inflated property prices.

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Many could get around this by using their pension cash as a sizable deposit for a home, with a mortgage used to fill the gap. Most buy-to-let loans are not subject to tougher affordability tests which came in from last year and that often preclude mortgages which extend into retirement.

Rightmove cited Council for Mortgage Lenders data which show buy-to-let mortgage loan numbers were already up by 23 per cent in 2014 as the sector rides a wave of growth even before new pension rules.

Miles Shipside, Rightmove’s director, said that its agents are reporting a "high level of interest" from new landlords, who are typically first-time, retirement age, buy-to-let investors.

“With the highest returns for the lowest investment being at the lower end of the market, the first-time buyer property sector will be the greatest recipient of any increase in demand from investors with substantial pension pots.”

He pointed out that lower-end properties favoured by first-time buyers and investors are in short supply in many locations due to increased competition among mortgage lenders, who are also chasing landlords with offers of low rates for lower risk.

“Some cash-rich pension pot buy-to-let investors will also be tempted by those tax-deductible mortgage rates, creating further upwards price pressure in a market sector that is already out-stripping the higher-priced ones.”

However, while there are tax benefits to buy-to-let relative to residential purchases, most pension savers will find themselves hit with a major tax liability if they cash in their pension for property - and the bill could ultimately be enough to put many off altogether.

As well as marginal rate taxes for the initial withdrawal, which could extend to 40 or 45 per cent depending on the amount released and that would apply to all other income earned that year, buyers would face stamp duty charges on the property itself. Buying also brings a range of other costs.

So poor a move to most advisers consider buy-to-let for many retirees that one adviser questioned the FCA during a recent FTAdviser retirement freedoms event on whether he should simply walk away from clients insisting they wish to go down this route.

Separately, Rightmove's monthly house price index revealed the average new seller asking price is just £30 below the all-time high of £281,782 last June, following a 1 per cent rise in the price of property coming to market.