Retirement: Planning to raid your pension to invest in buy to let? 6 reasons why you should think again


6 reasons why people who plan to raid their pension to invest in buy to let should think again New research has discovered that an astonishing number of people plan to raid their pension pot and invest in buy to let property.

From April next year anyone over the age of 55 will have unprecedented access to their pension, with no restrictions on the amount of money they withdraw. It appears that large numbers of people plan to use these new freedoms to buy rental property.

The survey by Bank of Ireland found that:

  • 47% of Londoners plan to use their pension pot to buy an investment property
  • 29% in the rest of the UK plan to do the same

Buy to let is traditionally seen as a lucrative way of generating an income. In fact the Bank of Ireland survey found that nearly 50% of people, who are not currently landlords, are interested in purchasing a buy to let property over the next two years.

However, the survey also found a large knowledge gap, with 30% of people failing to understand the tax treatment of investment properties.

Whilst buy to let is undeniably popular, here are seven reasons why anyone planning to raid their pension to fund it should think again:

#1: You will probably get a large tax bill

Whilst ‘Pensions Freedom’ will give you greater access to your pension pot, this comes at a price; namely tax.

Anyone taking enough out of their pension to buy a rental property will almost certainly be hit with a large tax bill. But does everyone know how the rules work? Probably not.

From April 2015, you will still be able to take out 25% of your pension as a tax-free lump sum. However, anything more will be added to your other income, for example your State Pension, and taxed at 20%, 40% or even 45%.

Taking money from your pension could prove to be a very taxing way of investing in a buy to let property!

#2: Lower income than an Annuity

Annuities have become the villain of the pension world over the past few months. But if your aim is to turn your pension pot into a guaranteed income, for the rest of your life, they have to be considered.

Shortly after the ‘Pensions Freedom’ announcement we compared buy to let with an Annuity, to see which would give the most income.

Mainly due to Annuity rates being generally higher than rental yields, coupled with the tax payable when money is withdrawn from the pension, we concluded that on a pension pot of £100,000 an Annuity could produce an extra £40,000 over a typical 20-year retirement.

You can read the full article by clicking here.

#3: Income Stability

The income from an Annuity is guaranteed. An Income Drawdown arrangement can also provide a stable, if not guaranteed, income.

However, income from a buy to let investment can fluctuate dramatically. Void periods could leave you with no income, whilst other costs, such as agent’s fees, maintenance and insurance will also eat into your returns.

Could you pay your bills if your income from a buy to let property was suddenly ‘turned off’? If not then buy to let probably isn’t for you.

#4: A business not an investment

Buy to let is far from hassle free and can feel more running a small business rather than an investment.

Even if you employ a letting agent to manage the property for you, owning additional houses or flats certainly comes with added responsibility; after all, it’s someone else’s home.

Buy to let can certainly be a rewarding option, but it definitely isn’t hassle free, or indeed something you should consider if you like a quiet life.

#5: Recent house price rises

The latest figures from the Halifax show that house prices have risen by 8.8% over the past year and prices in many areas of the UK are now above levels seen in the last housing boom.

We will only know whether now is ‘the top’ of the market over the course of the next few months. But what is certain is that house prices have risen substantially over the past few years. Investors should therefore ask themselves whether now is the right time to buy a property, especially if capital appreciation is a key goal.

#6: Access to your cash

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Under the new ‘Pensions Freedom’ rules once you hit 55 you will be able to access your pension pot at any time. It might take a few days, and there will certainly be forms to fill in, but the money is there waiting for you. Although, don’t get too tempted, it has to last you for the rest of your life!

How do you get your cash out of a buy to let?

The obvious way is to sell it, but this can take time, usually at least three months, possibly longer. During that time it’s possible that your tenant will have left, preferring to seek more stable accommodation, leaving you with no rental income.

It’s certainly easier to take money from your pension, than it is a buy to let property.

Raiding your pension for buy to let? Perhaps you should think again

Buy to let may well work for some people as part of a diversified range of investments. But we don’t believe, in the majority of cases, taking money from a pension to fund it is a sensible option.

Why? Two key reasons:

  • The tax payable when large lump sums are withdrawn could be significant
  • For most pensioners the priority is to generate an income, we believe there are better, more stable options, than a buy to let

Of course everyone’s circumstances are different and individual advice is important to make sure you choose the right options.

We are here to help

If you would like to know more about the options you have for turning your pension pot into an income, we’re here to help.

Call one of our IFAs today on 0115 933 8433, alternatively enquire online or email

Please note

The Financial Conduct Authority (FCA) does not regulate buy to let mortgages.