Buy-to-let has been one of the most successful investment opportunities over the past decade, and now there is to be complete flexibility as to how pension funds should be invested or spent, it is being suggested a potential net rental yield of perhaps 5% makes buy-to-let an option well worth considering.
Since withdrawals in excess of the 25% tax-free cash available from a pension pot will be subject to tax at the investor’s highest marginal rate, most investments would be funded by the tax-free cash. In many cases this would be more than sufficient for a property purchase. But there are snags.
First, there are costs involved. Putting aside the hassle of dealing with tenants and repairs, stamp duty will be payable on the purchase and capital gains tax on a sale.
Secondly, having a buy-to-let property in addition to one’s home could represent a risky commitment to a single asset class, namely the unpredictable property market.
Third, property investment is illiquid, and it could prove difficult to sell the investment in the event of an unexpected need for cash.
Fourth, if the purchase involves any borrowing, it would be unwise to base financial calculations on current interest rates. At some point in the future they are bound to rise.
Finally, there is the political risk. The housing shortage benefits landlords but penalises tenants, mostly young people, and this situation is being supported by the Government, which pays out housing benefit of around £9.5 billion every year and relieves landlords of some £5.6 billion in tax. This situation might not be permitted to continue.
The housing shortage might be addressed by an acceleration in the building of new homes, which would cause rents to fall. Equally, the demand for rental accommodation would fall if the UK were to leave the European Union and East European renters were to leave the UK.
Buy-to-let can be a good investment, however serious consideration should be given before using pension savings.
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