Pension savers risk throwing away thousands of pounds of their hard-earned savings if they raid their pension to purchase a second property according to Royal London.
Research undertaken by YouGov for Royal London reveals one in seven (15%) people aged over 55 would consider investing in a buy-to-let property to fund their retirement.
This type of buy-to-let (BTL) investment could be foolhardy, if you also taken into consideration the latest figures by UK Finance, which show a 40% increases year-0n-year of BTL repossessions during the third quarter of 2019.
Director of Benham and Reeves, Marc von Grundherr, commented: “While a number of new legislators changes have dented the financial return available to the average landlord, a buy-to-let investment is still one of the safest going and we are yet to see a single owner fall into arrears so far this year, nor have we seen a single landlord fall foul of a repossession in the last five years.
“Of course, the UK rental sector is a vast and varied landscape and not every landlord will benefit from the strong demand found within the capital. With that in mind, this latest news should act as a wake-up call for the government to end its stranglehold on the very people that provide a home for the masses reliant on the renting in order to survive.”
“There is little understanding of how pension lump sums are taxed and people could find out too late and lose many thousands of pounds.”
Income tax and stamp duty costs
Royal London analysis shows that not only would a saver have to pay income tax on any pension withdrawal; they would also incur costs such as stamp duty. These taxes can bite huge chunks out of the initial sum meaning people may need to radically rethink what type of property they can afford.
The situation gets worse the bigger the pension is. Someone in England with an £800,000 pot would be left with just £511,400 of their pension left while in Scotland they would be left with just over £489,000. This is before other costs associated with moving house such as solicitor’s fees are taken into account.
While seeking financial advice would ensure people were aware of these costs and their likely impact, just over a quarter (27%) of those who said they would use their pension to fund a buy to let property said they were unlikely to take financial advice.
Fiona Hanrahan, business development manager at Royal London, said: “The flexibilities brought in with Freedom and Choice prompted many retirees to consider taking their pension as a lump sum to purchase a buy to let property.
“However, by doing this they risk being clobbered with tax to the extent that they are unlikely to be able to afford the property they were hoping to buy and would need to look at something smaller. There is little understanding of how pension lump sums are taxed and people could find out too late and lose many thousands of pounds. We would urge anyone thinking of going down this route to speak to a financial adviser to go through their options.”