Following on from my post last week about taking the benefits from your pension plan as cash, I would also like to touch on the growing number of media outlets that are suggesting that people use their pension pot to purchase a buy to let property.
In the same format as last week, I have run a couple of very simple examples to show the tax implications of drawing money out of a pension in order to fund property purchase. For simplicity I am assuming that our subject has £100,000 in a pension pot and is considering purchasing a buy to let property that would have a 5% rental yield after expenses. We will also assume that the pension fund could generate a 5% return after fees. We will assume our subject has £20,000 per annum of other lifetime income.
Option 1 – Take all of the pension pot as cash and purchase a buy to let property
£100,000 pension pot could be taken as:
£25,000 Tax free
£75,000 will be subject to income tax as follows
£21,865 @ 20% = £4373 tax
£53,135 @ 40% = £21,254 tax
The client would receive £74,373 in cash and pay £25,627 in tax
£74,373 is then invested in a buy to let property and a 5% income is drawn from the property.
The income would be £3719 per annum ( this would reduce to £2975 after tax)
Option 2 – Leave the money invested and draw an income from the pension
£25,000 could still be drawn from the pension tax free (however this money is no longer needed to purchase a property and can be used as income)
£25,000 will provide income for 8.4 years based on £2975 per annum (as the property would produce above)
£75,000 remains invested and earns 5% per annum return on average for the 8.4 years mentioned above.
The £75,000 is now worth £111,793 (approximately).
5% income on this amount is £5589 per annum which would be £4471 after tax.
The client could also choose to draw larger amounts from the capital as well if required.
While property can form an important part of a retirement portfolio it would be wise to consider the tax consequences before taking the plunge!