From Pensions To Property

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!

 

 

 

"The value of investments and the income from them may fall as well as rise. You may get back less than you originally invested"