Using your pension for buy to let properties
Due to new rules being introduced about pensions, over 55s will soon be allowed to invest their pensions into new things. Many people are considering putting their money into buy to rent properties. However there are a few things that one should be aware of before they do this.
Before these new rules were announced you could only use your pension to buy an annuity and the investment options that you had were very limited; the only real flexibility came in the form of "drawdown schemes".
There are a few good places to look for advice when considering your options including the government run "Pension Wise" scheme and finding advice from independent organisations that can advise you on your specific situation.
In This Guide:
Your new pension options
The new rules that came into force in April 2015 now allow you to do any of the following things with your pension:
- Leave the pension sum until you want the money
- Have a guaranteed income: receive 25% of your sum without tax and then buy an annuity.
- Have a flexible income: take smaller cash sums with each being 25% free of tax.
- Receive your whole pension sum: 25% of which will not be taxed
Using your pension pot for buy to let
Although it can be a sound investment to use your pension fund to purchase a buy to let property, there are some things that you should definitely take into consideration.
- You are permitted to remove your entire pension sum at once but you should remember the amount of tax that you will have to pay.
- Even though house prices have risen steadily over the past few years, there is no way of knowing how the market will behave in the future.
- Rent has gone up consistently but it is worth bearing in mind that rental costs vary a lot in different locations.
- Mortgage costs are at an all time low but buy to let mortgages are not completely tied to this trend.
- There are many additional fees that could affect the price of your mortgage so take these into consideration in addition to the mere cost of the mortgage.
Investing in property
One difference with a buy to let mortgage is that lenders will not only take your personal income into account but also your rental income. This means that if they think you could stand to charge a fair amount on rent, they are more likely to approve your loan.
Most buy to let mortgages are given in the form of interest only mortgages as opposed to full repayment mortgages. This means that your repayments will only go towards paying off the interest that you owe on the mortgage, instead of decreasing the amount that you owe with each repayment.
Buy to let mortgages are also considered to be higher risk investments which means that you will normally have to fork out a lot more for a deposit than you normally would have to. This is because these types of arrangements are commercial as opposed to personal.