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Alternative sources of retirement income

This article is part of
Guide to The Brave New Pensions World


A common tale many advisers are telling is of estate agents contacting them to see if their clients want to use their pension cash to purchase a buy-to-let abode to see them through their twilight years.

Buy-to-let offers the potential for growth and bricks and mortar is a visible investment, which many investors find reassuring. If the right abode is purchased, a buy-to-let could provide a regular income.

However the success of buy-to-let relies on the investor’s ability to find good tenants and the availability of suitable properties.

The investment also comes at a price with the property needing to be maintained, insurance costs and the cost of agents also have to be factored in.

Also, property is an illiquid investment and there may be delays in selling if the individual needs the cash for immediate needs, for example if they must move into long term-care.

Once again, Aegon’s Mr Macmillan points out that buy-to-let is not as tax efficient an option as pensions.

In terms of the pot to buy bricks and mortar advisers should note cash will be taxed as income on the way out of a pension, possibly pushing people into a higher tax bracket and leaving a smaller fund to buy a property.

All income taken in the same tax year will be subject to the higher marginal rate, income tax will apply to rental income, while stamp duty will be charged on the purchase price. Capital gains tax is payable on growth following the sale of a property and on death the property will form part of the estate for IHT and will be taxed accordingly.

David Trenner, technical director of Intelligent Pensions, says there are some dubious property salesmen looking to pick up investments of money that is withdrawn from pension funds.

“While collective property funds give a bit of diversification direct property investing involves high risk of value falling (negative equity was a huge problem throughout the 1990s), vacant periods and high management costs.”

Investment funds

An array of different investment vehicles are also being presented to advisers as an alternative by fund managers who are keen to push their wares.

Investments offer the potential for growth and/or regular income depending on the individual’s risk appetite. But value and opportunity for growth will vary according to the markets.

With this approach there is a very real risk of the value of an investment falling and therefore the pension experts FTAdviser spoke to warn certain vehicles may not provide an adequate retirement income. Also, certain investments will not provide a regular income.

On death any investments will form part of the estate and be taxed accordingly.

To avoid this, funds could be invested in via a pension wrapper such as a Sipp, which would also typically provide drawdown or lump sum access options from which to take income. Where the income over time stacks up, the option could therefore be a viable part of a retirement portfolio.