Simon Morris, a property adviser to investment funds and bonds, has examined the risks of the newly liberated over-55s investing their pensions into property.
On 6 April reforms came into effect that allow people who are 55 or older with a defined-contribution pension to remove their money as a lump sum instead of buying an annuity. Retirees are allowed to remove 25 per cent of their pension fund tax-free, while the remainder will be taxed at the same rate as income.
Morris writes: “Research indicates that a third of people between 45 and 64 may cash in their pension pots to invest in the buy-to-let market. Statistics show that every GBP1,000 invested in the buy-to-let sector in 1996 is now worth GBP13,048. With interest rates remaining low, property seems like a relatively risk-free investment opportunity.”
However, Morris warns that this isn’t always the case: “Investment is a risk vs reward game. You may be able to withdraw 25 per cent of your pension tax free, but the rest will be taxed at a considerable rate. Will you regain your investment or will you lose your pension fund? And how long will it take to make a profit?”
Morris feels that there’s a lot of risk involved in taking out a pension as a lump sum to invest in buy-to-let. He identifies the three key risks of investing into buy-to-let as, firstly, tenants who can be unreliable and property which could remain empty for periods of time. Secondly, while property prices do increase, he warns that they can also plummet.
“Your original investment is not secure or guaranteed. London has seen significant house price rises in the last few years, but these increases are not UK-wide, so do your research in terms of location and history of property prices.”
The third risk is that although interest rates are currently low, if you are using a pension lump sum as a deposit and buying the property with a mortgage, it’s likely that interest rates will increase and so too will the repayments.
Morris also suggests that potential investors need to take several measures before they cash in their pension as a lump sum to invest in property. “Ideally, you should reserve taking out a lump sum as a last resort and be wary of cold calling companies who are selling products to you. Decide on your own, then research companies and use an Independent Financial Advisor (IFA) to choose the best product for you.”
“An experienced IFA will weigh up your appetite for risk against your expectations regarding yield, to point you in the direction of the right financial product for your circumstances.”
Morris also advises retirees to look at alternative property investment vehicles. He says:
“You don’t need to invest in bricks and mortar stock to capitalise on UK property. You could consider property bonds and funds. They can provide you with tax advantages when they’re used within an ISA wrapper and some products guarantee your initial investment. I would always suggest that a potential investor seeks as much independent advice as they can and opt for a regulated investment product if they want to generate healthy returns.”
