Headwinds build against pensions for buy-to-let
09-13-2015
In August, 15 per cent of people withdrawing cash from their pension under the new pension freedoms said they were using the money for house purchases, Fidelity Worldwide Investment reports. Within this group, it found there was an almost equal split between those who want to buy for their own use and those who wanted to invest in buy-to-let.
Previous research from Platinum Property Partners had indicated that a third of people nearing retirement age were considering cashing in their pension pots to invest in the buy-to-let market, which does not seem to be playing out.
Richard Parkin, Fidelity's head of retirement, says: "While property purchase has peaked this month, if you look at this overall, it would seem unlikely that we will have an entire generation of retirees seeking to become property moguls."
Nevertheless, 7.5 per cent of retirees considering a buy-to-let is significant. And there are several headwinds to buffer if you are thinking of a buy-to-let property, which may seem more daunting to someone in retirement.
It would seem unlikely that we will have an entire generation of retirees seeking to become property moguls”
Retirees are allowed to remove 25 per cent of their pension fund tax-free, while the remainder can also be drawn as a lump sum but will be taxed at the same rate as income. If you need to use more than 25 per cent of your fund for the property purchase, then consider if you can recoup the tax paid and how long it will take to do so, making allowances for void periods when you are finding a new tenant.
If you're using a mortgage to finance a buy-to-let (some lenders, such as Nationwide Building Society, will allow people of retirement age to do this) there are potential interest rate rises to factor in, plus potential tax changes.
Under the current rules, individual landlords can deduct the full amount of their mortgage interest to calculate the taxable rental profit. However, it was announced at the Summer Budget that deduction for mortgage interest will be restricted to basic rate (20 per cent) income tax only and this measure will be phased in over four years from April 2017, until the relief is completely restricted come 2020-21.
Chartered accountant Blick Rothenberg say a buy-to-let landlord with debt of £250,000 and interest charged at 3.25 per cent will see their annual income tax liability increase by approximately £2,000 (if they are a 45 per cent taxpayer).
You may think you will have more time in retirement to manage the property and tenants but be realistic about whether you'll still feel up to this in 10 or 20 years' time. Do you have someone in your family who is prepared to step in and help out in your later years?
Landlords have several legal responsibilities, including:
■ Keeping rented properties safe and free from health hazards.
■ Making sure all gas and electrical equipment is safely installed and maintained;
■ Following fire safety regulations.
■ Providing an Energy Performance Certificate for the property.
■ Protecting your tenant's deposit in a government-approved scheme.
Draft regulations were laid earlier in the year to require private sector landlords to install at least one smoke and carbon monoxide alarm on every storey of their rental property from 1 October 2015 or risk a £5,000 fine. The House of Lords has this week rejected the draft legislation at its final stage on the basis that the proposed introduction is less than three weeks away, that the government has not done enough to inform landlords of the changes and that the legislation is poorly worded.
However, it's another thing to think about. Do you have the energy to keep abreast of changes in legislation?