From pensioner to buy-to-let landlord

The latest changes to the way pensions work promise greater flexibility and more freedom. But if you choose to take advantage of them, it's up to you to make investments that can secure you an income throughout your retirement.

What changes are expected in the coming year?

Under the old rules, over 55s were allowed to take a maximum of 25% of their pension fund as a tax-free lump sum. Any withdrawals after that would be charged at 55% tax. This meant that most pensioners would leave the majority of their pension in the pot, finding other ways to turn it into a steady income, in order to avoid losing out to the tax man.

From April 2015, over 55s will be allowed to withdraw as much of their pension pots as they like, without any obligation to buy an annuity (a product which guarantees an income for life). For each withdrawal they make, they'll get the first 25% tax-free, with the rest being charged under their normal rate of income tax.

What does this mean for pensioners looking for a buy-to-let?

On the face of it, investing in property seems to be a solid idea: the value of property tends to keep growing, and the potential rental income could seem much more attractive than the current modest annuity rates. However, things are a little more complicated than that.

Suppose you have a pension pot of £200,000. If you were to withdraw the entire pot at once, you'd get 25% (£50,000) tax-free. The rest (£150,000) would be charged at your normal rate of income tax. But withdrawing such a large amount would push your annual income into the 40% tax band and beyond – meaning you'd lose more than £50,000 to the tax man before you even got started.

After that, you need to take the cost of stamp duty, conveyance fees and surveys into consideration, as well as any repairs or maintenance on the property itself. There's also the  cost of landlord insurance , void periods and possibly even a lettings agent to work out.

Alternatively, you might be able to make significant savings on the tax you pay by taking lump sums gradually over a number of years. For example, withdrawing £200,000 in five £40,000 instalments over five years should leave you with a much smaller portion of your annual income in the 40% bracket. That first £40,000 could even form the deposit for a  buy-to-let mortgage .

What about those who already own properties?

Existing landlords looking to sell their properties would ordinarily face substantial capital gains tax (CGT). But, through a new type of fund that invests in rental properties, landlords can swap their properties for the fund's shares, which can then be placed into a pension. By transferring these shares into a Self-Invested Personal Pension (SIPP), you can claim tax relief from HMRC, which could offset the CGT you'd pay for selling your properties in the first place.

Once in the SIPP, your shares could grow in value without being affected by CGT. And, with the new pension reforms of April 2015, you'd be able to gradually withdraw an income in a tax-efficient way. As an added bonus, you could continue to enjoy a regular income from the properties you've invested in, without worrying about the costs of repairs, lettings agents or void periods.

If you’re thinking of putting money into buy to let or other investments out of your pension, remember to speak with a recommended financial advisor. You can find more information, including a free telephone advice line, at the  Money Advice Service .

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