Your Pension could now buy a Southampton Buy to Let property

We are all well aware that the pension rules changed in April and I want to look a little deeper into the subject of your pension and the Southampton property market. George Osbourne, in last years’ Budget, announced pension reforms that came into effect this April, which will give people with pension’s unprecedented access to their pension pot and the freedom to look for alternatives. In a nutshell, since the 6^th of April, anyone aged over 55 will be allowed to withdraw all or part of their pension pot and spend it as they wish. Until now, you were allowed to take out a quarter of it and were forced to buy an annuity policy with the rest.

However, there are always two sides to a story, good and bad. Let me tell you the bad news first. There are some hefty tax implications by taking money from your pension pot. As before, as per the old rules, the first 25% can still be withdrawn from the pension pot tax free, but here is the sting in the tail, if you take more than a quarter of your pot, anything above that initial 25% level will be taxed as income. So if you took the whole lot out, the first 25% will be tax free but the remaining 75% will be taxed at your marginal income tax rate of 20%, 40% (or even 45% if you earn over £150,000 a year).

.. And now the good news!

Under the old scheme, if you bought an annuity, when you died your annuity normally died as well. You would have no asset to pass on to your family. Also, the returns from pensions are awful at the moment.  Hargreaves state if you were 55 years old, the best rate you would get on your annuity pension would be 4.4% fixed for life or 2.2% but the payment would go up with inflation.  The sort of rates (also known as yields in property investing) being achieved in Southampton are in the order of 5% to 7%, and they tend to rise in line with wages. 

The other aspect of property investment is how property values have risen consistently over the last 50 years.  According to the Office of National Statistics, the remaining life expectancy of a 65 year old male in Southampton is 18 years exactly (its only 17 years 7 months in Portsmouth). If we roll the clock back 18 years to May 1997, property values in Southampton have risen by 164.65% to today. You wouldn’t have had that with your pension!   But this is the biggest win, even by taking a hit in income tax now,  by buying a property, you buy an asset that you can pass on to your family when you die.....Food for thought.

So where next? It totally depends which strategy you are going to look at, one strategy is to look to achieve relatively small rental returns (ie low yields) in an up market area which has decent capital growth or, alternatively, another strategy is to buy properties in not so good areas known to produce a high returns (ie high yields) but low capital growth (ie how much the value of the property goes up). It is best to speak with a financial advisor about your pension pot and long term wealth management and now, maybe, is the time for property to be considered in the portfolio.