By Sharron Fletcher, Partner at RAE Business & Property – www.raeyorkshire.co.uk
From April 2015, millions of pension savers aged 55+ will be able to take their entire pension fund in one lump sum. So I’ve taken the time to review how the April 2015 pension changes could be a game changer for property investors.
Summary of the April 2015 pension reforms
- Pension savers aged 55+ will be able to make their own decisions with their pensions. So, no more forced annuities, red-tape, and pension fund charges – if you choose.
- However, there is a tax trade-off – only 25% of pension money can be taken tax-free. Funds taken beyond this amount are taxed at the individual’s highest tax rate. So, careful extraction of monies out of a pension fund is required to avoid a high tax bill. For example, rather than take it all out in one lump sum – in year one take out 25% tax free, and in the following years take out the amount that keeps you being taxed at 20%.
Five ways that property investors can use monies from their pension funds
- Reduce your BTL mortgage or improve your LTV – Most property investors use interest-only mortgage finance to purchase BTL property. If you’re a property investor that intends to pay off this mortgage, access to your pension fund over the next few years can help you pay off more quickly. If you’re a property investor that wants to stay highly geared, the additional capital from your pension can allow for a lower LTV leading to a reduced mortgage rate.
- Benefit from the higher demand – If you’re a property investor that has been in the property market over the last few years and have suffered from depressed property prices, consider taking the opportunity to sell up and benefit from the increased demand due to the flow of funds into the residential property market from the April 2015 pension changes.
- Improve the value of your property portfolio – Use your pension fund monies to carry out refurbishments or alterations to your property portfolio to increase its rental value.
- Buy more investment property – Use the monies to invest in more property, as some lenders will provide BTL mortgages to property investors up to the age of 90. At 55, you can still manage your own property portfolio and as you get older you can delegate most of the management to professionals – leaving you to enjoy your retirement whilst hopefully benefiting from a more enhanced ROI.
- Use other people’s pension funds – If you haven’t your own pension or need more pension monies, why not use other people’s pension funds. If you can put together a good ROI opportunity, an ideal JV partner after April 2015 may well be someone with a sizeable pension fund who wants to improve their ROI.
Wealth Warning – Always take specialist advice from an Independent Financial Advisor when considering withdrawing your funds from your pension fund or investing funds generally.
Article prepared by Sharron Fletcher CTA, Property Tax Specialist – firstname.lastname@example.org