As 'freedom' day looms...
Pensions-into-property warning for retirees
With new retirees free from next week to spend their pension pots in any way they like, pundits have suggested that many will put some or all of the money into a ‘buy-to-let’ property for both rental income and capital appreciation.
This has prompted Scotland’s largest independent letting and estate agency to step in with a checklist containing 12 key points which anyone in this position would be advised to consider before taking the plunge.
DJ Alexander, whose managing director, David Alexander, describes the checklist as “rather like a traffic light for older people before they decide to proceed down the buy-to-let highway”.
He said: “Some points will show red, some amber and some green. Which signal a person decides to follow will depend very much on how much capital they have and their overall attitude to risk but also, crucially, their mental and physical ability to take on this commitment at a relatively late age.
“While there are several issues to think about, the biggest consideration of all could be: “Do I want to get into this at my time in life?” “
He continued: “Buy-to-let principles apply to any adult age group but someone who is newly-retired, or nearing retirement, will clearly have a different perspective than someone in their twenties, thirties or forties and there will be physical and mental differences to consider. Also, a pensioner will not have a regular salary to fall back on if the investment goes wrong and there may be dangers in tying up all of one’s capital in a property – issues unlikely to apply to a younger person with a good income.
Mr Alexander added: “I must emphasise that while DJ Alexander considers itself a good authority on the rental market, it is not offering specific investment or taxation advice related to property and people seeking this should still speak to a qualified advisor. However, I consider our checklist is a worthwhile starting point for anyone in their fifties or sixties considering buy-to-let for the first time.”
THE DECISIVE DOZEN
Twelve points to ponder for members of the older generation before entering buy-to-let for the first time.
- A young man’s game? Clearly anyone over the age of 55 is likely to differ in fitness, health and general attitude to the younger generation. Even with the help of a managing agent, buy to let property is rarely entirely hassle-free so do consider your ability to handle the pressure – and the older you are the more there will be to consider.
- You still want to go ahead? Well, basically there are three options with regard to choice of property. Assuming you get the location right (see point 5), a property in need of some refurbishment will likely provide the best overall return simply because it will be less expensive to buy and can be improved relatively inexpensively. As for property in ‘move in’ condition, ‘traditional’ will show better capital growth than ‘modern’ although the latter is less likely to have repair and maintenance issues.
- If choosing refurbishment someone of your age should, ideally, have relatives and friends prepared to ‘pitch in’ with the work or possess sufficient funds to pay for reputable contractors.
- Too much on your own? Then consider a shared purchase with younger members of the family or perhaps get involved in a joint venture with a newly-retired friend who has a pension pot similar in size to yours.
- Location is the key to a successful buy to let investment. A two-bedroom flat in a top area will almost always provide a better overall return than a four-bedroom one in a mediocre area. Personal taste should also be set to one side. You are not purchasing a ‘second home’ but engaging in an exercise in realising a financial gain – pure and simple.
- Don’t tie up the entire fund in property, if you have no other capital or source of income to fall back on.
- Think about taxation. Taking out all or part of one’s pension pot (in addition to the tax-free lump sum) could lead to a hefty income tax bill in the first year of retirement (depending on the total involved). Also just like income from an annuity or from annual ‘drawdown’, rental income could be subject to income tax.
- Take into account rental void (i.e. periods when a property lies unoccupied, usually due to a changeover of tenant). Depending on seasonal vagaries, rental void in any one year could be anything between one and eight weeks. So if, for example, you have sights set on income of £800 a month, do not presume that you will actually receive £9,600 in a year (i.e. £800 x 12). Also set aside part of rental income for repairs, maintenance, buildings insurance, management fee and, increasingly, the cost of various annual certificates required of landlords by the authorities.
- If selling on, consider the implications of CGT (capital gains tax). Investors in stocks and shares can spread profits over several years to avoid or at least minimise CGT whereas this is not possible with a property sale if it produces a large enough surplus. Currently the tax-free threshold is £11,000, and anything above that is taxed at either 18 per cent or 28pc depending on the size of the gain and taxable income. These rates are, of course, for an individual – one good reason for putting the property in the joint name of husband and wife.
- Care home cash cow? While the ‘liberation’ of’ pensions has been widely welcomed, there may be a sting in the tail. A property bought with a pension pot is clearly a capital asset, which the authorities can compel you to use to contribute to care or nursing home accommodation should this be required at some future stage.
- You can’t take it with you…..but you can bequeath the property to your loved ones on death. If this is part of your motive, take into account the possibility that a substantial uplift in the property’s value over the course of your retirement may mean greater exposure to inheritance tax on your estate. Currently the rate is 40pc on all assets over £325,000 (unless passed on to a surviving spouse).
- Is it still for you? If so, fine but do try to be honest with yourself. While property offers the security of savings plus the more favourable returns associated with the stock market, the latter two require little or no effort on the part of the holder and as capital assets are a lot more liquid.