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Home NewsNew pension freedom – buy-to-let to be an attractive option

New pension freedom – buy-to-let to be an attractive option

Technology makes budgeting so much easier!With new pension regulations now in force, many over-55s are reconsidering how they will use their hard-earned pension pot to generate an income now that annuities are not their only option.

Boom expected in buy-to-let

The new rules apply to approximately 320,000 people each year who retire with a defined contribution pension plan.

With so many pensioners looking at new pension choices for the first time, estate agents are predicting a boom in the buy-to-let market, with many over-55s deciding to spend their pension pots on rental properties. Property in London, with its historically high capital returns (15% – 85% over the last five years depending on location) and good rental yields (average rents in London increased by 5.7% in 2014 according to the Royal Institute of Chartered Surveyors), is definitely proving to be an attractive option.

How can you take your pension?

The new pension rules mean there are now several options as to how you take your money.

  • you could buy an annuity providing you with a regular income for life (as previously)
  • you could take a quarter of your pension immediately, tax-free
  • you could take out sums whenever you like, with a quarter of each lump sum free of tax (amounts over a quarter of the total sum will be taxed at your highest rate)
  • you could take out some cash, leave some invested and buy an annuity with the remainder
  • you could take the whole amount immediately as a lump sum (the first quarter will be tax-free but you will have to pay tax on the remainder)

According to research by ITV News, many savers could be planning to cash in their pension pots. They have reported that over 75% of callers to Fidelity (which has over one million customers) have enquired about cashing in their pension pot, as have 65% of callers to Phoenix Group (which has over five million customers).

Financing buy-to-let

If you decide that buy-to-let is right for you, you could, for example, use part of your pension to put down a deposit on a rental property, then finance the remainder using a buy-to-let mortgage. Some lenders have already begun to launch new buy-to-let loans for older investors looking to take out a mortgage rather than using their entire lump sum to buy a property. You will probably need to put down a deposit of at least 25% of the purchase price and the interest rate on the loan will probably be higher than for a standard home loan.

Do your homework

For most, there is no rush to make a decision – your pension will need to provide an income for the rest of your life and none of us knows if that will be one year or 40 years. So caution – and research – are essential.

The golden rules of purchasing buy-to-let property

If you’re considering buy-to-let to help fund your retirement, remember that it is a business and there are many issues to consider before you take the plunge take a look at our Landlord’s Guide to Letting for more information.

Research properties and locations

First, you should research properties and locations well. Choose areas of London that are currently relatively undervalued (usually on the fringes of popular central London locations), where rental demand is high and those which offere an easy commute into central London. If you look in the right locations, it is still possible to find rental properties in London offering a 5% rental yield. The regenerated area of Kidbrooke has been attracting keen interest from tenants and landlords, take a look at our blog here for more information.

Who will your tenants be?

Decide what type of tenant you are aiming for as this will determine the type of property you buy – the most sought-after rental properties are usually one or two bed apartments which appeal to young professionals.

A good letting agent is essential

You must find a reputable letting agent local to the property to find and vet tenants and ideally take charge of property management too – there are over 100 pieces of local authority and government legislation relating to property rental to deal with and hefty fines for non-compliance.

Check the credentials of your letting agent

Check which professional memberships the agent belongs to – they should be a member of ARLA (the Association of Residential Letting Agents) and industry schemes such as the Property Ombudsman, the TDS (Tenancy Deposit Scheme) and the London Rental Standard.

Researching the buy-to-let market

There can be quite a steep learning curve when you purchase your first buy-to-let property and these are just a few pointers to consider. However, the financial rewards of buying a London rental property are potentially much higher than leaving your nest egg in a savings account that is probably not even keeping pace with inflation.

Of course, you’ll pay income tax on your profits but you would pay tax on the income from an annuity too – and the potential rewards are much greater. You have the additional benefit of being able to pass the property down to your children.

The key to a successful buy-to-let business is research. Your first point of call should be your local letting agent – a good agent should be happy to offer advice on which locations offer the best value and the best rental demand. They should also be able to provide you with information on the legal aspects of letting too.

If you would like to discuss the pros and cons of buying a rental property in London, please feel free to contact any of our London letting offices where our experienced staff will be able to help.


About the Author

Vidhur studied Management Sciences at Manchester University, focusing on accountancy, before going on to qualify as a chartered accountant. He began his career working in investment banking but after several years decided to join Benham and Reeves in 2003. Since then he has expanded the finance department, introducing a broader range of services to encompass all financial aspects of property investment, from collecting rent through to completing tax returns (or ATED returns for overseas companies). Read more about Vidhur Mehra here - Read full profile