Is It A Good Idea To Cash In Your Pension And Invest In Property?

People spend years putting money towards their pensions and once retired they usually receive the money in instalments, however changes are being made and in April 2015 retirees will be given the option to either receive their government pension in instalments or cash it in all at once. This will give people more freedom with their money but unfortunately the lump sum will be taxed as income.

When retirees are given the ability to receive their government pensions in one lump sum some may be tempted to invest their money into buy-to-let properties – but is it worth it? Pensioners are already being warned that they will have to pay more tax if they take out their pensions all at once compared to those that stick with annuities (converting pension savings into income, lasting you the rest of your life), however this is not enough to put some people off.

The popularity of investing in residential property has increased massively over the past few years due to soaring house prices, with over 2 million landlords for buy-to-let properties in Britain. These price trends may continue and if they do they could outweigh the tax disadvantages of taking out a pension in one lump sum. In fact, around 200,000 people are expected to cash in their pensions after April next year, while 32,000 (16 per cent) are anticipated to use the money to pay for a property according to Ipsos Mori research.

Purchasing a property may seem like a fantastic opportunity when receiving a relatively large amount of money all at once, but some may be in for a shock. According to Hargreaves Lansdown, if you use a pension of around £300,000 to buy a property and live off the rent for 20 years you will pay around 43 per cent more tax than someone who chooses to keep their money in a pension scheme and receive an annuity over the same time frame.

Hardreaves Lansdown’s Tom McPhail added: “Taking all your cash out to invest in property is going to appeal to some people but it comes with a high price to be paid to the taxman. Anyone considering taking advantage of the new pension freedoms to invest in property should first look very carefully at the tax implications.”

According to Home.co.uk gross yields on buy-to-let properties average around 4.2 per cent in Britain but this doesn’t include tax, maintenance costs and mortgage repayments. Along with this, house prices are rising 7.2 per cent more than a year ago and the cost for a home averages at £175,653 according to the Land Registry.

Meanwhile, the Association of Residential Letting Agents (ARLA) has claimed that every £1,000 contributed towards a 75 percent loan-to-value home loan last year would eventually be worth £2,910 by the end of 2023 – an approximate yearly return of 11.3 percent. In comparison, yearly returns on un-mortgaged financial specialists are only around 6.3 percent.

Before you think of investing in buy-to-let property you need to take into consideration every aspect of becoming a landlord. You will need to research whether it would be worth it with the amount of tax you would have to pay and include any bills, maintenance fees, landlord insurance, interest on your mortgage and much more!

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