Should Investors Swap Pension for Buy-to-Let?

By Simon Morris On Monday, September 28 th, 2015 · no Comments · In

With the threat of an interest rate hike hanging over our heads, is this a good time to release a lump sum pension to invest in buy-to-let? Simon Morris recently considered the evidence to ascertain whether investors should take out a pension to invest in the buy-to-let residential property sector.

Taking advantage of pension reform 

Research from Association of British Insurers shows that nearly a quarter of a million payments worth £1.8 billion were made to customers from pension pots from April to May 2015. The fact that April was the month recent pension reforms went into effect, suggests some savers are choosing to capitalise on these new freedoms.

Meanwhile, Prudential research indicates that over a third of home owners aged 55+ say they’re planning to buy an additional property within their lifetimes.  This was cited as a response to recent pension reforms by one in every seven respondents. Almost 20% admitted they want to purchase either a buy-to-let property, second home, home for a relative, or a developmental property.

A study of 20,000 people conducted by the Office For National Statistics found that 42% say property is the secret to creating the largest pension fund possible; an increase of 10% in five years. The Telegraph has also noted that there were nearly 700 buy-to-let loans on the market, as of June 2015. This is a 15% increase within two months of pension reforms coming into effect, overall the evidence suggests some people believe they can invest in buy-to-let and retire on the rental income.

Weigh up risks and rewards 

Expert Simon Morris commented on this idea. He was quoted by Property Report saying:  “No investor should cash in their pension to invest in buy-to-let in hopes of securing a stable income stream, without first weighing up the risks and rewards of buy-to-let.

“A study conducted by Wriglesworth Consultancy showed that on average, every £1,000 invested in buy-to-let since 1996 was worth £14,987 by the end of 2014. Take London out of these figures and investment growth is not as attractive. Meanwhile, the average UK rent hit £937 in July 2015; a rise of 4.6% from the year before. This suggests that potential landlords can reap significant rental income from buy-to-let, but this investment option also comes with considerable costs.

“You can only remove 25% of your pension pot tax-free, and the rest is taxed at the same rate as income. Then you have to factor in the costs of paying a buy-to-let mortgage and keeping up with residential property maintenance costs. A 2015 Platinum Paragon Property Partners study showed that the average cost of a buy-to-let property to landlords is £8,359 per year – and that’s without factoring in extenuating circumstances, such as the cost of void tenancies.”

Ask tough questions 

Continuing, Morris said: “Every investor who’s thinking of investing a lump sum pension should look at expected yield, offset the expected initial investment of a residential buy-to-let property and compare them with annuity returns. Which is more likely to supply the stable stream of income needed to provide support throughout retirement and weather the changing economy?

“I’d also advise potential investors to do extensive research before they cash in their pension to purchase a buy-to-let property. Seek advice from an Independent Financial Advisor (IFA) who’s authorised by the Financial Conduct Authority. The IFA will be able to recommend the financial products best suited to a potential investor’s appetite for risks and expectations concerning yield.”

Conduct extensive research 

Simon concluded by adding:  “Investors should also explore a wide range of property investment products, beyond traditional bricks and mortar stock, before they commit. They may find that property bonds, investment funds and other products that can be invested in an ISA wrapper allow them to secure stronger returns at less risk. Some of these investment vehicles can also provide tax advantages or guarantee initial investment.”

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