Pensions, property and potential pitfalls
Pensions and property cross paths at many places, but there are two particular points I’d like to mention to stop savers sleepwalking into potentially costly mistakes.Wed Jul 01 09:01:39 BST 2015 Back to results
The first is when people decide to use money from their pension pot to invest in a buy to let property. This isn’t a bad idea per se, but it does require careful consideration.
The new pension freedoms have got lots of people thinking about what they want to do with their money. Many feel comfortable with bricks and mortar and believe a buy to let investment will provide a cast iron return to help fund later life, before the asset is passed on to loved ones after death. But it’s not that straightforward.
Before the new pension freedoms came into force, the then pension minister Steve Webb famously said that if people wanted to cash in their pension and buy a Lamborghini then it was up to them. Our contact with customers suggests that not many want a super car, but plenty are investigating buy to let.
An entry model Lamborghini costs £180,000, so let’s use the same figure for a possible buy to let investment. Assuming that a pension saver has already earmarked their tax free cash lump sum for something else and they have no other taxable income then they’d have to withdraw £303,000 from their pension to have £180,000 left after tax. The full calculation is broken down in our webinar(Opens new window)
Yields vary depending on the type of property and its location, but 5% is reasonable and so investors might expect to generate £750 a month from rent. But there are also a lot of associated costs to consider in a property purchase including stamp duty, conveyancing charges and valuation fees.
There will then be ongoing maintenance costs for the property, void periods to cover when tenants move out, agency costs, insurance premiums, and income tax to pay on the rental income received.
If pension savers need to turn their buy to let investment back into cash, it’s also worth remembering there’s no guarantee they’ll be able to sell it quickly or for the price they paid - let alone the £303,000 it actually cost them.
It may be that pension savers can make a buy to let investment work effectively for their circumstances, but it’s something they must consider carefully. While considering this, you should also explore the other options available to generate an income for later life, and Aegon’s Your Retirement Planner tool(Opens new window) should help do just that.
The second meeting point between pensions and property that I want to discuss is when people look to generate a lump sum by downsizing from their family home.
Unfortunately property prices don’t work on a pro rata basis and so a two bedroom house isn’t simply half the price of a four bedroom house. This discrepancy often means that if people want to realise the amount they’d imagined, they’ve got to buy in a less expensive area and that takes them away from friends, family and all of the local amenities they’ve got used to.
This emotional upheaval is stressful and is made worse when the confines of the new property demand the sale of furniture and other personal belongings.
Before the election David Cameron pledged to change the inheritance rules on joint-owned family homes and said those up to a value of £1m would be exempt. This may encourage people to stay put, but if they do it’ll come at the cost of running and maintaining the bigger property. This in itself can be costly and as people get older managing a larger house can be very demanding.
And so while downsizing might not raise as much money as hoped or be as logistically simple as people think, it will reduce ongoing costs and make managing the property easier.
The point is that to find the right solution to fund a retirement income people should take time to think through any financial decision in detail as there are a lot of factors to consider. Making sure all of the angles are explored properly will prevent costly and emotionally draining mistakes at a time of life when people can least afford to make them.