Cashing in retirement cash to fund buy to let investment is a risk that can cost landlords thousands of pounds in valuable savings, claims a pension provider.
One in seven over 55s would trade their pensions for property to fund a better retirement, says research by financial firm Royal London – while 29% of those aged between 45 and 54 years old would consider the move.
But property experts at the company have worked out income tax and stamp duty would grab a huge slice of a saver’s pension cash, leaving them unable to afford the property they would like.
For example, the firm’s experts calculated someone living in England with a £400,000 pension would have to pay £120,000 in income tax if they accessed their pension as a lump sum. As they would be purchasing a second property they would also be liable for second home stamp duty which would take a further £12,400 from their pot. This would leave them with just £267,600 of their initial investment.
And the figures worsen the larger the pension pot.
Someone with a £800,000 fund would finish with just £511,400.
Other set-up costs would have to be paid, such as legal fees and any refurbishment costs.
Fiona Hanrahan, business development manager at Royal London, said: “The flexibilities brought in with pension freedom and choice prompted many retirees to consider taking their pension as a lump sum to purchase a buy to let property.
“However, by doing this they risk being clobbered with tax to the extent that they are unlikely to be able to afford the property they were hoping to buy and would need to look at something smaller. There is little understanding of how pension lump sums are taxed and people could find out too late and lose many thousands of pounds.”