The government’s pension changes might just spawn a canny new generation of buy-to-let silver investors.
From April 2015 new rules about the way pensions work come into effect. It will mean that the three million people aged 55 or over who retire each year with money purchase pension schemes (as opposed to salary related pensions) will be in charge of their pension and able to take as much money out of their pension ‘pot’ as they see fit – to invest or spend. Pensioners will no longer need to take out an annuity to provide retirement income, as most with money purchase schemes previously did. This means that retirees will have a choice about how their money is invested – and it is expected that many will opt for a buy-to-let investment. Here is what potential ‘silver landlords’ need to know before committing themselves:
Dipping into the pension pot
Retirees will no longer get just one chance to take a single tax free lump sum worth 25% of their pension pots. Instead, they will be able to dip into their pension when they like and get the first 25% of all withdrawals tax free, with the remainder taxed as income.
Little and often
This means that accessing the remaining 75% of a pot could get expensive when added to any other income if it tips into the higher rate tax bracket. A higher rate taxpayer taking his or her entire pot of £200,000 in cash, for example, would pay tax at 40% on £150,000, resulting in a bill of £60,000. For this reason, it is likely that most retirees will withdraw smaller amounts of money in stages.
Andrew Johnson, regional financial services director at KFH, notes that mortgage wise it will not be difficult for older borrowers to obtain a mortgage deal – provided they are able to meet the lenders’ requirements. ‘Most will lend to buyers over the age of 55. However, if the required term of the mortgage takes the borrower above their planned retirement age, most lenders would need to see proof of a pension income to sustain the monthly mortgage payments. Some lenders only want to see evidence of a pension payment being made, while others will want to see projections on those incomes.’
Funding the investment
Johnson expects that a more likely scenario, however, will not be retirees getting a mortgage for their buy-to-let property, but withdrawing a lump sum to entirely fund the investment property; potentially done over time to avoid higher tax. ‘They would then look at replacing the pension income with rental income instead,’ he says.
Jessie Hewitson is a property and personal finance writer at The Times. Before working at The Times she was a freelance property and travel writer for, among other publications, the Telegraph and Tatler magazine. She is a second time home owner living in Crouch End in North London, with her husband and son.