SIMON MORRIS: CASHING IN YOUR PENSION TO INVEST IN PROPERTY

In April 2015 retirees will have the right to spend their pension pot in one go if they wish to, thanks to pension reforms made by the Government.

It’s expected that some of these retirees will look to become buy-to-let landlords as way to take advantage of demand in the property market. Should they be wary?

Investors pause for thought

Simon Morris is a London-based property expert who uses his specialist knowledge of the commercial property sector, to advise UK property investment funds on how to maximise profitability. He wants to take the time to warn prospective landlords of the higher tax bills they face if they invest in bricks and mortar housing stock, rather than invest in property funds inside an ISA wrapper.

There are an estimated two million buy-to-let landlords in Britain, and of 200,000 people who are expected to cash in their pension next year, about 16 per cent of people (32,000) are expected to use the money to fund a property purchase.

While property has risen in price over the last 20 years, and may be expected to continue to rise, the system of taxing property owners may give some investors pause for thought.

Taxman

If you cash in a £300,000 pension to buy a property, and you expect to live off the rent for the next 20 years, you’ll find you’re taxed 43 per cent more than someone who keeps the money in the pension and draws an income from it.

A wiser move maybe to take the tax free 25 per cent sum tax-free lump from the pension, and invest this in a property fund through an ISA wrapper. This way you’d gain from property rises and avoid costly taxes. No tax on the 25 per cent lump sum, no tax on the ISA. For more information on property investments please read Simon Morris’ Guide to Property Investment Options.

The other advantages of investing in property funds through an ISA include the lack of problems associated with being a landlord, including maintenance costs, lack of liquidity and problem tenants.