The pension reforms which came into force in April 2015 may tempt older borrowers to use a lump-sum withdrawal to invest in property but this could be very risky, expert Simon Morris warns.
Putting some money into property, especially with interest rates likely to rise soon, could also persuade some people to use pension funds for buy-to-let.
Simon Morris weighs up the evidence to determine whether now is a good time to consider replacing pensions by investing in buy-to-let residential property.
Recent data suggest big interest in buy-to-let among retirees
Data from the Association of British insurers has shown that some savers are choosing to take advantage of pension reform. Between April and May 2015, almost a quarter of a million payments worth £1.8 billion were made to customers from pension pots.
New research from Prudential indicates that more than a third of home owners aged 55 and over are planning to buy at least one more property in their lifetime. One in seven said that this is a response to the pension reforms enacted on 6th April 2015. Almost one in five said that they want to buy either a buy-to-let residential property, home for a relative, second home or a developmental property.
An Office for National Statistics Study of 20,000 people showed that 42 per cent believe that property is the secret to creating the largest pension fund possible; a 10 per cent rise from 2010. A Telegraph article reported that as of June 2015, there were now almost 700 buy-to-let loans; a 15 per cent rise in the two months after pension reforms went into effect.
This evidence suggests that some people believe they can invest in buy-to-let and live off the rental income throughout retirement.
All should do a cost-benefit analysis before investing
Simon Morris comments: “No investor should cash in their pension to invest in buy-to-let in hopes of securing a stable income stream, without first weighing up the risks and rewards of buy-to-let.”
“You can only remove 25 per cent of your pension pot tax-free, and the rest is taxed at the same rate as income. Then you have to factor in the costs of paying a buy-to-let mortgage and keeping up with residential property maintenance costs. A 2015 Platinum Paragon Property Partners study showed that the average cost of a buy-to-let property to landlords is £8,359 per year – and that’s without factoring in extenuating circumstances, such as the cost of void tenancies.”
Compare expected buy-to-let yield and annuity return
“Every investor who’s thinking of investing a lump sum pension should look at expected yield, offset the expected initial investment of a residential buy-to-let property and compare them with annuity returns. Which is more likely to supply the stable stream of income needed to provide support throughout retirement and weather the changing economy?
Seek advice
“I’d also advise potential investors to do extensive research before they cash in their pension to purchase a buy-to-let property. Seek advice from an Independent Financial Advisor (IFA) who’s authorised by the Financial Conduct Authority. The IFA will be able to recommend the financial products best suited to a potential investor’s appetite for risks and expectations concerning yield.”
Make sure you have enough choice
“Investors should also explore a wide range of property investment products, beyond traditional bricks and mortar stock, before they commit. They may find that property bonds, investment funds and other products that can be invested in an ISA wrapper allow them to secure stronger returns at less risk. Some of these investment vehicles can also provide tax advantages or guarantee initial investment,” Morris concludes.
