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Analysis from Old Mutual Wealth highlights cost of investing pension in buy-to-let 

14/11/2014

From April 2015 individuals will be given the freedom to withdraw their entire pension pot as cash after age 55. Research suggests that 12% already plan to take their entire pension as cash but most do not know how it will be taxed.* Among those who withdraw some or all of their pension as cash, many will hope to invest in buy to let. Analysis from Old Mutual Wealth shows the scale of the tax implications they face.** 

Scenario 1 - £100,000 pension:

£19,627 income tax bill

After costs individual has £78,373 to invest

7% yield on buy to let = 5486.11

Yield on £100k pension to achieve equivalent income = 5.4861%

Scenario 2 - £200,000 pension:

£53,627 income tax bill

After costs individual has £144,373 to invest

7% yield on buy to let = £10, 106.11

Yield on £200k pension to achieve equivalent income = 5.0531%

Scenario 3 - £500,000 pension:

£154,877 income tax bill

After costs individual has £342,123 to invest

7% yield on buy to let = £23,948.61

Yield on £500k pension needed to achieve equivalent income = 4.7897%

Old Mutual Wealth Retirement Planning Expert Adrian Walker says:

“The new pension freedoms give people the choice to use their hard earned savings as they wish. But anyone looking to withdraw their pension pot and invest it in property should think carefully.

“Firstly, only 25 per cent of the initial withdrawal will be tax free, with the rest taxed as income. That will significantly deplete the funds available to buy property.

“An individual withdrawing £200,000 would face a minimum tax bill of £53,627. After property fees, we calculate they would have just £144,373 left to spend. That is not enough for a one bedroom flat in many parts of London and the South East.

“On top of the sizeable tax bill incurred when cashing-in the pension pot, the assets are likely to be taxed more heavily on death, meaning individuals may have less to leave behind for their loved ones.

“This is because plans to scrap the 55 per cent ‘death tax’ on pensions mean investments left in a pension will in future be transferable to beneficiaries with zero tax for those that die before 75, or at the beneficiaries’ marginal rate thereafter. In contrast, a buy to let property would typically be included within the individual’s estate, making it liable for inheritance tax at 40%.

“There are other risks as well. We are already seeing signs of slowing house prices in London and investing in buy to let means an individual takes out a large exposure to fluctuations in the rental and house price market. Investing in a balanced portfolio of liquid investments helps spread risk.

“Many retirees may feel able to manage a buy to let investment now but should consider their ability to do so later on in retirement and remember that they may need to sell the properties if they need long term care in the future.

“Finally, while the Government’s guidance guarantee will offer information on the tax implications of taking pension benefits, TPAS and CAB are unlikely to be able to help with decisions about what you do with your money having withdrawn it from a pension. People should consider taking advice from a qualified financial adviser to ensure they do not make the wrong decision.”

Notes

*Ipsos Mori research conducted for Hargreaves Lansdown

**Analysis based on 2014/15 tax rates. It assumes the individual withdraws the entire pension as cash. For the purposes of this analysis we have assumed the individual has no other taxable income in the year they withdraw pension savings. In reality, many will have other income such as state pension or salary, meaning taxation on the cash withdrawal will be even higher than our conservative estimates. We have assumed a 7% yield on the property investment and calculated the necessary yield on the original pension pot in order to achieve an equal income. Yields (on both pension and buy to let) do not factor in tax on income. This is because it is highly unlikely a private pension or buy to let will serve as an individual’s sole source of retirement income, making tax difficult to calculate accurately. While both rental income and pension income would be taxed at the individual’s marginal rate, 25% of each income withdrawal from a pension could be taken as tax free cash if using flexi-access. See attached for a full breakdown of the figures.

For more information contact

Michael GlenisterOld Mutual Wealth020 7778 963807469 144535michael.glenister@omwealth.com

Notes to Editors:

Old Mutual Wealth is a leading wealth management business in the UK and internationally, helping to create prosperity for the generations of today and tomorrow.

Old Mutual Wealth oversees £131.3 billion in customer investments (as at 30 September 2017).

It has an adviser and customer offering spanning: Financial advice; investment platforms; multi-asset and single strategy investment solutions; and discretionary fund management.

The business is comprised of two segments: Wealth Platforms and Advice and Wealth Management.

Wealth Platforms includes the Old Mutual Wealth UK Platform; Old Mutual International, including AAM Advisory in Singapore; and the Old Mutual Wealth Heritage life assurance business.

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Old Mutual Global Investors (‘OMGI’) is the asset management business of Old Mutual Wealth with £39.8bn funds under management (as at 30 September 2017). On the 19th December 2017, Old Mutual Wealth announced that it has agreed to sell its Single Strategy asset management business to the Single Strategy Management team and funds managed by TA Associates. The proposed transaction is subject to customary closing conditions, including regulatory approvals. 

Following managed separation from Old Mutual plc, Old Mutual Wealth will rebrand to Quilter plc. Each of the businesses within the Quilter Plc group will be rebranded over a two-year period, with the exception of Quilter Cheviot, which will retain its existing name.

Old Mutual Wealth is part of Old Mutual plc, a FTSE 100 group that provides life assurance, asset management, banking and general insurance. Old Mutual is trusted by more than 19.4 million (as at 31 December 2016) customers across the world and has a total of £212.3 billion of assets under management (as at 30 June 2017).

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