Buy to let is a popular property retirement investment for landlords often at the expense of more formal pension saving.
But there is a way to combine the two despite strict rules about holding residential property in a pension.
The retirement plan of choice for property investors is a self-invested personal pension or SIPP, but the same rules apply to ISAs for more accessible savings.
Regardless of the tax wrapper, two rules apply for investments:
- Individual homes are barred
- Special rules apply to ‘tangible moveable property’. This covers a range of investments, such as art, antiques, fine wines, cars, boats and helicopters.
The aim of the rules is to stop pension savers gaining tax relief on assets that could provide personal use.
The good news is a host of other investments from stocks and shares through to cash or gilts are allowed.
These allow a combination of property and pension saving.
Shares in Real Estate Investment Trusts (REITs) are traded on stock markets and combine residential property investment with cash contributions into a SIPP or ISA.
REITs must pay 90% of rents back to shareholders as dividends.
Other property trusts and funds allow pension savers to take a stake in commercial property, while business owners can hold their premises in a SIPP – providing no residential property is involved.
The penalties for breaking the residential rule are steep – starting at 55% of the value of the investment.
Like any investment strategy, diversification is advisable and banking on buy to let and property in a pension is risky if the market drops unexpectedly.
Another pitfall is cashing in an investment may take some time as property can take months to sell, and during that time the cash is tied up.