Interview: Is it Possible or Prudent to Invest in Property with a Pension?
with Kristen Durose Kristen Durose is the managing director of Red Star Wealth Management, a company of independent financial advisers based in Blackpool, Lancashire. You can see her company website here.
Since 2015 people have had a lot more freedom to decide what they want to do with their pension but is using it to invest in property a viable option? The answer is yes but there are restrictions. Releasing your pension entirely has tax implications and you can only invest in commercial property with your fund.
Common Questions About Investing In Property
Amy: Something I’m interested in, Kristen, is what are the common questions that you’re getting asked about investing in property?
Can I Use My Pension To Buy A Property?
Kristen: One of the big questions that we get asked is, “Can I use my pension to buy a property?”
There are two strands to this question.
Firstly, there are people who want to take all of their money out of their pension and go and buy a property with it. This is a common idea following the introduction of Pension Freedom, in 2015.
And secondly, we get asked a more straightforward question which is, “Can I use my pension fund to go and buy a property?”
Pension Freedom, 2015
Kristen: So, taking the first question. After Pension Freedom came in, the idea came to people that you could withdraw all of your pension funds, without restriction and use it to buy a house.
As we have alluded to before, people like to invest in bricks and mortar and prefer that to something they can’t see and touch like a pension fund.
And so a question we get is, “Can I take all of my pension money and go and buy a house?” and the simple answer to that is yes, you can, as long as you’re prepared to pay the tax on it.
Because if you withdraw all of your pension funds it is added to your income for tax purposes in the year that you take it. So, if you withdraw a pension fund of £100,000, a £100,000 is added to your income for that year and taxed accordingly.
So, the chances are you’re definitely going to pay 40 percent tax on some of it, you might pay 45 percent tax on some of it.
It isn’t as simple as withdrawing money as you would from a bank account, unfortunately. So, this fact does tend to stop people using their pension fund, in that way.
Using Your Pension To Buy Commercial Property
Kristen: The second question, “Can you transfer your pension into property?” is yes, as long as it’s a commercial property.
There was a rumour, some years ago, and I think people still talk about today, that you can buy residential property with your pension. You can’t.
You can buy an office or warehousing but you can’t buy a residential property, a hotel or anything of that sort.
The Benefits To Using Your Pension To Invest In Commercial Property
Kristen: If you do decide to use your pension to buy a commercial property, there are some real significant benefits.
For example, when you sell the property you won’t get charged any capital gains tax because it’s part of your pension. Also, any income that comes in through rental goes into your pension and isn’t taxed because your pension is a tax-free vehicle.
There are, obviously, restrictions, when you get the money back out again. But there are some significant benefits including the fact your pension can borrow money in order to help you buy.
So, there are benefits.
And, if it’s a commercial property that you’re looking at, particularly if it’s a commercial building that you’re going to operate your business out off – your company will be paying the rent for the building that your pension fund owns – it may look very attractive.
We help clients a lot with setting up this kind of arrangement. That’s one of the specialities of our firm that we that we help people on that.
But it’s got to be understood that it can’t be a residential property.
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