The caution around pensions and buy-to-let

The caution around pensions and buy-to-let

Pensions and property have often been linked together.

Nearly a year after the government’s changes to pension rules saw pensioners become able to withdraw as much as they like from their pot from the age of 55; the two are still very much related, with many pensioners using lump sums to invest in buy-to-let properties.

The question is – should they?

Property can be a beneficial investment. At the moment, 45% of brokers expect the new “norm” for rental calculations to increase to 135% from 125% over the next 12 months.*

However, regardless of whether you have access to your pension pot or not, rushing into investing in rental property is something that shouldn’t be done.

If you do decide to invest your pension, you won’t be able to rely on the sole income of one property, so you should consider the time it takes to build a property portfolio.

You should also be aware that this will be an active investment, so if you are of an older age, it may not be the right choice for you.

The new buy-to-let rules…

From 1 April, 3% (above the current rates) will be charged on the purchase of additional UK residential properties.

For example, a property bought now for £500,000 would attract tiered SDLT rates of 0% on the first £125,000, 2% on the next £125,000 and 5% on the remaining £250,000, or £15,000 in total.

But after 1 April, if the purchaser already owns one or more residential properties, the rates will be 3%, 5% and 8% respectively, or £30,000.

This comes in addition to the news that, from 2017, the amount of tax relief landlords can claim such as mortgage interest payments will begin to be progressively reduced over the following four years.

When the new restrictions are fully in force from the beginning of the 2020/21 tax year, landlords will be only be able to claim tax relief at the basic tax rate of 20%, instead of 40% or 45% for those in higher or top rate income tax brackets respectively

Is there a reason for the changes to the sector?

The changes in SDLT could stop buy-to-let growth in its tracks and may well see the disappearance of the boom that has been present over the last decade.

The move made by Chancellor George Osbornehas made it very clear that he is on the side of ‘Generation Rent’, and by shutting off future investment in the Private Rental Sector (PRS), he’s certainly shifted the view of the market. With fewer properties in the PRS, housing availability will increase and make it easier for more first-time buyers to step onto the property ladder.

What’s more important – rental yield or capital growth?

Both are as important as one another. Every investor is looking for something different with their investment.

Careful consideration of both is imperative when choosing what to do with a property, whether it’s investing your pension or if you find yourself becoming an ‘accidental landlord’, which is where you may find yourself with a property you can’t sell or a property that you have inherited that you decide to let out. 

*survey by Mortgage Solutions