Simon Morris, an independent property investment consultant, urged pensioners not to draw down their full pension pot, incurring potentially penal tax charges with the intention of reinvesting the cash into buy-to-let.
He said: “Investment is a risk versus 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?”
On 6 April reforms came into effect that allow people who are 55 or older with a defined-contribution pension to remove their money as a lump sum instead of buying an annuity.
Retirees are allowed to remove 25% of their pension fund tax-free while the remainder will be taxed at the same rate as they pay income tax.
A recent report by peer-to-peer lender Landbay revealed show that every £1,000 invested in the buy-to-let sector in 1996 is now worth £13,048 – a return just shy of 1400% over 18 years.
And insurer Direct Line For Business recently published analysis suggesting that a third of people aged between 45 and 64 with a pension would consider using some or all of their retirement funds to buy property.
Morris has warned that with interest rates remaining low, property “seems like a relatively risk-free investment opportunity”.
He said there are three “key risks” of investing into buy-to-let:
1. 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.
2. Property prices have increased but they can also plummet. The original investment is not secure or guaranteed. London has seen significant house price rises in the past few years, but these increases are not UK-wide, so research on location and history of property prices is fundamental.
3. Interest rates are currently low, so if clients 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 repayments.
Morris also suggested that potential investors need to take several measures before they cash in their pension as a lump sum to invest in property.
He said: “Ideally, clients should reserve taking out a lump sum as a last resort and be wary of cold calling companies who are selling products to you.
“An experienced IFA will weigh up investors’ appetite for risk against their expectations regarding yield, and point pensioners in the direction of the right financial product for their circumstances.”
Morris also suggested that retirees to look at alternative property investment vehicles, adding: “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.”