Tax savvy

Posted on January 16, 2020

Savers should think twice before using their pension to purchase property

From age 55, you have the flexibility to choose how you take money from your pension. But pension savers risk throwing away thousands of pounds of their hard-earned savings if they use their pension to purchase a second property.

Research undertaken by YouGov[1] reveals one in seven (15%) people aged over 55 would consider investing in a buy-to-let property to fund their retirement. However, for those approaching the age at which they can access their pension (45–54), the figure almost doubles to 29%.

Taxes can be considerable
The analysis shows that not only would a saver have to pay Income Tax on any pension withdrawal, but they would also incur costs such as stamp duty. These taxes can be considerable and reduce the initial sum, meaning people may need to radically rethink what type of property they can afford.

As an example[2], someone living in England with a £400,000 pension would have to pay £120,000 in Income Tax if they accessed their pension as a lump sum. As they would be purchasing a second property, they would also be liable for second home stamp duty, which would take a further £12,400 from their pot. This would leave them with just £267,600 of their initial investment. The situation for someone in Scotland is even less favourable, as the different regime means they would be left with just £261,400.

Before other associated costs
Someone in England with an £800,000 pot would be left with just £511,400 of their pension, while in Scotland they would be left with just over £489,000. This is before other costs associated with moving house, such as solicitor’s fees, are taken into account.

While seeking professional financial advice would ensure people were aware of these costs and their likely impact, just over a quarter (27%) of those who said they would use their pension to fund a buy-to-let property said they were unlikely to take financial advice.

Source data:
[1] The YouGov research used a UK representative sample of 2,014 UK adults. This was made up of 387 in the 45–55 age group and 1,627 in the 55+ age group.

[2] These calculations take into account the following assumptions: PCLS of 25% is taken – no other taxable income in the same year – SDLT, LBTT and LTT is based on the fund less any Income Tax – the property is for buy to let purposes – no other costs of property purchase have been taken into account

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.
TAX RULES ARE COMPLICATED, SO YOU SHOULD ALWAYS OBTAIN PROFESSIONAL ADVICE.

A PENSION IS A LONG-TERM INVESTMENT. THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE. PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

PENSIONS ARE NOT NORMALLY ACCESSIBLE UNTIL AGE 55. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS. THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION, WHICH ARE SUBJECT TO CHANGE IN THE FUTURE.

No guarantee can be given that the information provided is accurate in the present or the future. It is not intended to constitute either a statement of applicable law or financial advice, and responsibility cannot be accepted for any subsequent loss following activity or inactivity by any individual or organisation. Indeed, such information should NOT be acted upon without first receiving appropriate and specific professional advice.