There’s a new warning for people thinking of using their pensions to buy Buy-to-Let properties.
- Pensions and Buy-to-Let Properties: Some people are thinking of taking money out of their pension pots to buy a second home, especially to rent it out and get some income. This sounds like a good idea at first, because, hey, who wouldn’t want another source of income, especially when they retire?
- Research Findings: A study done recently showed that 15% of folks aged over 55 are thinking of doing this. But, the younger crowd, those aged 45-54, are even more eager, with 29% considering it.
Royal London, a big financial company, says, “Hang on a minute!” If you do this, you might end up with a hefty tax bill. Here’s why:
- Income Tax on Pension: When you take money out of your pension, especially a big chunk at once, you have to pay income tax on it. Think of it like this: you’ve been putting money into a piggy bank all your life, and now when you smash it open, a portion of those coins are going to Mr. Taxman.
- Stamp Duty: On top of that, if you’re buying a second home, you also need to pay something called ‘stamp duty’, which is an additional tax. This is a bit like paying an entry fee to a club; only this club is the “I own more than one house” club.
- Example: Let’s say you have £400,000 in your pension. If you take it all out at once to buy a house:
- You’d first pay £120,000 in income tax.
- Then, you’d need to cough up an extra £12,400 for the stamp duty (because it’s your second property).
- So, from the original £400,000, you’d be left with £267,600. That’s just two-thirds of your money!
A Deeper Look at the Numbers:
Depending on how much you have in your pension, here’s a breakdown of the taxes you’d be paying in England and Northern Ireland:
- £200,000 Pension:
- Income Tax: £52,500
- Stamp Duty: £4,875
- Remaining: £142,625
- £400,000 Pension (the example above):
- Income Tax: £120,000
- Stamp Duty: £12,400
- Remaining: £267,600
(And so on for larger amounts…)
If you’re in Scotland, the situation’s even a bit more challenging due to different tax rules.
- These numbers come from a situation where someone takes 25% of their pension tax-free and has no other income that year.
- The second home’s tax is calculated after the pension income tax has been sorted.
Advice (or Lack Thereof):
Even though experts can advise about these costs, 25% of those considering this move won’t seek financial advice. But, Royal London advises speaking to a professional. They warn that if you don’t understand how these taxes work, you could get a nasty surprise and lose a lot of money.
In a nutshell: If you’re thinking about using your pension to buy property, understand the taxes first or chat with someone who does!