Thinking of buying a buy-to-let with your pension? Think again.

It might seem like a wise decision at first glance — use your pension to buy a second home, which then produces an income after you retire. But a big problem with the plan is taxes.

YouGov research found that 29% of 45-54 years old and 15% of those over 55 consider investing in a buy-to-let property to fund their retirement.

However, Fiona Hanrahan, business development manager at Royal London, argues that those who do so ‘risk being clobbered with tax to the extent that they are unlikely to be able to afford the property they were hoping to buy.’

The taxes belong to two categories: income tax on a lumpsum withdrawal of any pension, and stamp duty. According to Hanrahan, investors have little understanding of how pension lumpsums are taxed.

Here are some examples. In England, people with a pension of £400,000 would pay £120,000 in income tax if they accessed their pension as a lumpsum, leaving only £280,000.

From that, the government would take the second home stamp duty, which is £12,400, leaving only £267,600 to buy a property with. That’s only 66.9% of the original pot.

The bigger the pot, the higher the tax. So if the pension is £800,000, then by the time both taxes have been removed, £511,400 will be left, or 63%.

It’s worse in Scotland. There, with its different tax regime, the amount the investor is left with is only 65.4% of the original amount if the pension is £400,00 and 61.1% of the amount if the pension is £800,000.

Given this situation, Hanrahan recommends getting advice. ‘We urge anyone thinking of going down this route to speak to a financial adviser.’

However, 27% of those surveyed who said that they might use their pension to purchase a buy-to-let also said they would be unlikely to take financial advice.
 

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