Investing Your Pension Wisely 1st Apr 2015
Pensions rules are changing this April ....
..... which will create significant opportunities. George Osborne, in last years’ Budget, announced pension reforms that come into effect this April which will give people with pensions unprecedented access to their pension pot and the freedom to look for investments other than annuities. In a nutshell, after 6th April 2015, anyone aged over 55 whether retiring or not will be allowed to withdraw all or part of their pension pot and spend it as they wish .... let’s assume buying a buy to let property for the purpose of this article rather than the Lamborghini that has been much heralded by the press! Until now, you were only allowed to take out a quarter of your pension and were forced to buy an annuity policy with the rest and then only on or after your retirement.
However, there are always two sides to a story, good and bad.
Let me tell you the bad news first. There are some hefty tax implications if you take too much money out of your pension pot to early. As before, the first 25% can still be withdrawn from the pension pot tax free but, here is the sting in the tail, if you take more than a quarter of your pot (25%), anything above that initial 25% level will be taxed as income. So if you took the whole lot out, the first 25% will be tax free but the remaining 75% will be taxed at your income tax rate of 20%, 40% (or even 45% if you earn over £150,000 a year).
...and now the good news!
For people retiring
Under the old scheme, if you bought an annuity, when you died your annuity normally died as well. You would have no asset to pass on to your family. Also, the returns from pensions are awful at the moment. According to Hargreaves and Lansdown Pension Advisors, if you are 55 years old, the best rate you would currently get on your annuity pension would be 4.4% fixed for life (so it would never go up) or 2.2% but the payment would go up with inflation.
Compare this with returns on buy-to-let property investing. These returns come in two forms – income growth (or yields) and capital growth. Yields of 5-10% can be achieved in Scotland at the moment and yields tend to rise in line with wages. Capital growth on properties has risen fairly consistently over the last 50 years. According to the Office of National Statistics, the life expectancy of a 65 year old in Scotland is 12 years. If we roll the clock back 12 years to April 2003, average property values in Scotland have risen by 141.2% (or 11.8% per annum) to today. Remember, on top of these yields and capital growth, you also have an asset you can pass on to your family.
People over 55 but not retiring
The benefits for people who are over 55 but who are not retiring can be even greater. Under the new scheme, these people can also take money from their pension pot and as mentioned, so long as it is not more than 25% of the pension pot, it can be tax free. There is therefore an opportunity for somebody to take up to 25% of their pension pot tax free, use this as equity to borrow further funds and invest the total in property. As an example, you could take £100,000 from your pension pot, borrow further £300,000 and the total £400,000 could be used to buy, say, four properties that could provide the returns mentioned above with the net income earned being reinvested into your pension pot in a tax efficient manner.
So where next?
It totally depends which strategy you are going to look at, one strategy is to look to achieve relatively small rental returns (ie low yields) in an up market area which has decent capital growth or, alternatively, another strategy is to buy properties in not so good areas known to produce a high returns (ie high yields) but lower capital growth (ie how much the value of the property goes up). Now, we are not financial advisors, so cannot offer financial advice on what the best thing for you with your pension is. However, we can share my knowledge and experience of the Scottish property market, what to buy, what not to buy and where to buy etc and can put you in touch with a good financial advisor.
Contact The Key Place.