Buy to Let v Flexible Pension Drawdown

Published / Last Updated on 12/12/2014

Video explores the tax differences between a flexible pension and a buy to let investment property and whether you should release tax free lump sums and income to buy an investment property.


“Hello there. This video is really a debate subject for you. I’ve read recently that a lot of consumers, the general public with the new pensions flexibility, that starts next year in April 2015, I’m currently filming this in our December 2014, with the new flexibility for pensions that starts next year lots of people are thinking about: “I got access to my pension fund, I'll release my tax-free lump sum from my pension fund and then potentially I’ll release the rest of my pension funds and I will go into the property market. I’ll look at the buy to let market.  Is the lower end property market, the rental market about to explode again because of the changes to stamp duty that started on 4 December 2014?”

So that set me thinking and I'd like to share my thoughts with you on buy to let versus pension drawdown.  So first things first with your pension and pension drawdown: yes you saving your pension fund, you receive tax relief when you invest in your pension fund and then when you come to draw it, when you start to take your pension benefits, you can receive a quarter of it, 25% as a tax-free lump sum and then the balance you can drawdown in regular income or lump-sum chunks as you choose. If you've decided not to buy an annuity that is, you can draw it down in chunks or in regular income but it is subject to income tax.

Now that's all well and good, if you can control it and you don't go over the tax thresholds but most of us when we look at our state pension as well then we’re probably already crashing over to become basic rate taxpayers.  So simplistic terms for drawdown:

  • You’re saving in your pension fund
  • It grows in a tax privileged environment and
  • You've received tax relief
  • Then when you start to draw your money from your pension, when you reach retirement:
  • 25% is tax free lump sum provided your resident in the UK and then
  • The balance, however you take it, whether it's annuity income or whether it's drawdown it is potentially subject to income tax.

So taking your money out: tax-free lump sum and then a balance that has been taxed and then buying a property for rental income purposes.

Buy to let isn't necessarily all it's cracked up to be. Reasons for that:

  • The rental income that you receive is subject to income tax and then
  • The capital growth if you get growth on your property depending upon where you buy that is subject to capital gains tax

So bricks and mortar buy to lets aren't necessarily that tax efficient.  Likewise, they’re subject to inheritance tax on death. So if you pass away, your buy to let investment will be included in your estate. so all along owning second properties and buy to let properties you got to take account of: right the rental profits are going to pay income tax on, if I sell I potentially pay capital gains tax and then when and if I die that is included within my estate for inheritance tax purposes.

Compare that to pension fund: tax relief when your money is going in when you're saving, it grows in a tax privileged environment, so you’re not paying capital gains tax even if you own a commercial property inside your pension fund, you’re not paying capital gains taxes.  When you come to withdraw the money: 25% tax-free lump sum and just the income is taxable.

[And then] the final point is on death with your pension fund: the Chancellor has announced even greater flexibility for death benefits where your pension fund: if you die before the age of 75 you can leave your pension benefits to your loved ones tax-free and even after a 75 you can leave your pension fund to your loved ones but they may only be taxed if obviously they’re taxpayers at the time.

So there is a debate here and it's: what I would say to you is when you're looking right on thinking about releasing my lump sum to then buy a buy to let property or something like that or pulling more of my pension fund out via drawdown to look at a buy to let investment, what I would say is it got to be the right property investment. Do your research. Look at the potential for capital growth on the property, look at is there a decent rental yield coming from the property in terms of comparing how much it has cost you, compared to the total income that you receive each year.  That's the yield, the rental yield.

Compared that to, like I say, leaving your pension inside a drawdown scheme potentially drawing down lump sums both the tax-free lump sum and other funds which are taxable as and when you need.  [And] I think it's a very close debate the pension fund is clearly more tax efficient but I accept that owning a buy to let investment, it is tangible, you can touch the bricks and mortar of the property that you've just bought but there are pros and cons for both.

For tax efficiency I think the pension fund and leaving in pension fund is a better bet but for right if you buy the right property then it may be buy to let is for you and it's something that is tangible and you may feel more secure by having a guaranteed rental income, if rental demand is high where you buy the property.

So it's a big decision I accept that there is an argument for and against.  All as I would ever say with things like this is you need to take professional advice and weigh up the pros and cons and for the numbers for buy to let versus pension and flexible pension drawdown. Thanks very much for watching.”

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