Buy To Let From Pension Cash Bonanza
with thanks to Technical Connections Ltd
The proposed April 2015 relaxation permitting unrestricted pension fund drawdown to all regardless of ‘pot size’ has carried some predictions of a flood of requests from ‘pension disaffected retirees’ to draw entire funds to invest into property with a view to generating rental income as a ‘pension’.
Apart from the potential extreme lack of diversification (in some cases) such a strategy could represent, there is also the obvious (but perhaps overlooked) point that aside from the 25% Pension Commencement Lump Sum (PCLS – tax free cash) the remainder of the fund withdrawn would suffer tax at the ‘withdrawer’s’ marginal rate in the tax year of withdrawal.
Say the investor had a fund worth £200,000. £50,000 could be taken as tax free cash. Say they had £10,000 of their basic rate threshold left in the year of encashment then based on 2014/15 tax rates and bands, the £150,000 would generate tax of £2,000 on £10,000 and about £57,000 on £140,000, leaving a net sum to invest of £50,000 (PCLS) + £91,000 = £141,000
Then there’s stamp duty (SDLT) on the value of property at 1% on a purchase over £125,000 up to £250,000 – that’s about another £1,400 gone, aside from any other expenses associated with the purchase.
And then, if a property can be purchased (with the tax reduced sum) with a net rental yield of, say, (a high) 5% the effective yield on the original £200,000 that could have otherwise been used to buy an annuity or remain invested to draw down from would be 3.5% pa. With a lower net rental yield (a function of property acquisition price and nominal rents available for the property being let) the net (pre-tax) yield could easily be lower than 3%. And, of course, there could be inlet periods and unplanned for renovation and refurbishment costs to factor in to an assessment of the overall return.
The rent would be subject to tax at the landlord’s marginal rate(s). The dividends received by the pension fund from the equity portfolio would come with a tax credit but this would be non-reclaimable. Any income “drawn down” from the pension fund would, of course, be taxed in full as pension income.
Naturally, in comparing the likely overall return, there’s also the chance of capital growth in the property to take into account – subject to capital gains tax on realisation but “wiped out ” ( for tax purposes with revaluation) on death . And there would also be the chance of capital growth on the investments held in the pension fund – with gains realised in the fund being tax free.
So, a potentially good idea in theory, but in practice, perhaps not so. Either way, advice will be essential.
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