Financial services company advises caution on investing pension funds in property

With a new surcharge on stamp duty on buy-to-let property and second homes being introduced on 1 April, Portal Financial, a leading financial services company, has seen a significant increase in enquiries from people considering using their pension pots to secure an investment property.

However, the company is urging people to exercise caution in purchasing property as a retirement investment, using the financial flexibility introduced by Chancellor George Osborne in 2015. The reforms piqued the interest of those close to retirement age when they were announced in 2014, with thoughts of using the money they had saved to spend or invest how they wished. A government minister even suggested that some people might justify blowing their savings on a Lamborghini.

However, the reality of the reforms have major tax implications and the finance professionals at Portal Finance point to significant costs, including tax on capital gains and income, for those thinking about investing their funds into property.

As well as additional overheads related to property ownership, such as insurance, maintenance and repairs, the new stamp duty surcharge will be an additional cost to be weighed up, along with the government’s reform to tax relief on rental income which is likely to reduce buy-to-let profits for many.

Jamie Smith-Thompson, managing director of Portal Financial, says: “This generation has seen house prices rise drastically over the long term so it is clear to see why they are confident investing in rental houses. It is very easy to get swept along with the belief that property is the ultimate investment, providing both income and appreciating value.

“But the reality is that after paying tax on the pension withdrawal – which could be as high as 45% – and the various fees when buying the house including stamp duty and legal costs, the buyer is at a substantial loss and the property’s value must rise significantly just to be back at square one.

“For many landlords, the profit margin is wafer thin and void periods, unpaid rent or maintenance can mean losing money rather than earning an income.

“Recent announcements by the Chancellor also suggest that buy-to-let is in the government’s crosshairs, so further changes and restrictions in the near future are definitely possible.

“Quite simply, if you are looking for an income in retirement and your finances are limited then the risks associated with becoming a landlord far outweigh the benefits for most people.”