Should People Remove Their Pensions as a Lump Sum to Invest in Property?

By Simon Morris On Tuesday, May 12 th, 2015 · no Comments · In , ,

Property expert Simon Morris recently spoke out on pension reforms and whether people should use them to remove their pension as a lump sum to invest in property.

Pension reforms

On 6th April 2015, reforms came into effect which change the way people can access the money saved in their pensions. Before they had to buy an annuity, which gives the saver a defined sum per month to live off for the rest of their life.

Now people who are 55 or over with a defined contribution pension can remove it as a lump sum. 25% of the removal is tax free, whilst the rest is taxed at a marginal rate. Research has shown that a third of people who fall into this category plan to use their pension to invest in the buy-to-let sector. Are they making the right decision?

The risks of investing in buy-to-let with a lump sum pension

Buy-to-let can be a lucrative investment strategy. Data shows that since the introduction of buy-to-let mortgages in 1996, every £1,000 invested in the market has appreciated to £13,048. Yet as Simon Morris pointed out recently, this investment plan has its own set of risks.

The property expert said: “Investment is a risk vs reward game. You may be able to withdraw 25% of your pension tax free, but the rest will be taxed at a considerable rate. Will you regain your investment or will you lose your pension fund? And how long will it take to make a profit?

“There’s a lot of risk involved in taking out a pension as a lump sum to invest in buy-to-let. The three key risks of investing into buy-to-let are:

  • Tenants can be unreliable and property could remain empty for periods of time – this results in an investor covering the mortgage and bills when the property is unoccupied.


  • Property prices do increase, but they can also plummet. Your original investment is not secure or guaranteed. London has seen significant house price rises in the last few years, but these increases are not UK-wide, so do your research in terms of location and history of property prices.


  • Interest rates are currently low, so if you are using a pension lump sum as a deposit and buying the property with a mortgage, it’s likely that interest rates will increase and so too will your repayments.”

Removing your pension should be a “last resort.”

Simon also went on to say that investors should do several things before they remove their pension as a lump sum and plough it into property. “Ideally, you should reserve taking out a lump sum as a last resort and be wary of cold calling companies who are selling products to you. Decide on your own, then research companies and use an Independent Financial Advisor (IFA) to choose the best product for you.

“An experienced IFA will weigh up your appetite for risk against your expectations regarding yield, to point you in the direction of the right financial product for your circumstances.”

Look at alternative investment vehicles

The property specialist also advised people to look at alternative investment vehicles. He said: “You don’t need to invest in bricks and mortar stock to capitalise on UK property. You could consider property bonds and funds. They can provide you with tax advantages when they’re used within an ISA wrapper and some products guarantee your initial investment. I would always suggest that a potential investor seeks as much independent advice as they can and opt for a regulated investment product if they want to generate healthy returns.

“I’d also suggest that investors take some time to look at the free guide to property investing in 2015 before they commit to any investment option. This guide was written to give private and commercial investors the information they need to ensure they are asking sensible questions prior to taking out any financial product.”

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