2/3rds of UK Pensioners to Cash-in Pension and Buy a House
According to a new report by the UCB Home Loans, a mortgage broker in the UK, over 2/3rds of Brits are going to use the new pension freedoms to buy a house in the UK or abroad.
We look into the benefits and disadvantages of pensioners cashing in their pensions to buy property in the UK.
But, the majority of British people have no idea of the tax they will pay on their pensions to cash them in.
Research conducted by UCB Home Loans shows that intermediaries have a strong belief in the benefits of buy-to-let, with 46% already owning buy-to-let properties themselves.
Mortgage brokers are going to go all out to sell the man on the street a house as a pension.
Not only are they exposed to large taxes in the form of income tax, missed pension contribution relief, paying highest marginal rate of tax up to 40% on cashing it in, stamp duty fees, capital gains tax at up to 28%, making their pension attributable to inheritance tax at 40%, but also, they will pay real estate fees, property management fees, legal fees, surveyor fees, title deed fees and maintenance fees.
Furthermore, the UK property market is at all-time highs.
Phil Tily, executive director and head of UK and Ireland, IPD, says
“The residential investment sector is one of the few areas of the market where both rents and capital values now exceed their boom time 2007 peaks. Our numbers show that values are now, in fact, 11% higher than during the last market peak. “
You can cash in your pension at age 55, but if you are buying property, you will be taxed twice! You will have to pay income tax when you cash in your pension and you will pay income tax on your rent. That is before you have even though about stamp duty, CGT or IHT on the house. Add all this plus the fees & costs of buying a house on top of sky high property valuations and a cashing in 100% of your pension to purchase buy-to-let doesn’t look too clever.
Other Pension Options Under Flexible Pensions Rules
The Guardian wrote a story practically encouraging the purchase of homes with the new pension freedoms, but also mentioned buying a lambourghini with your pension , sticking it in a bank and peer-to-peer lending at the higher end of the risk spectrum.
Whilst it is refreshing to read an article which talks about fast cars and lending fast money, it is perhaps not the best options for a sensible pension plan which is supposed to take care of you in retirement.
There were some other good ideas such as using your ISA allowance limit, but very little talk of delaying your lump sum drawdown, the power of compound interest and how to invest smartly in equities and bonds. There was also a mention of annuities which whilst interest rates are low are paying very low annual income for pensioners.
A smarter strategy would be to invest with investment management specialists who can rebalance your portfolio on a monthly basis. Why monthly, not yearly? Well most managers rebalance once per year, which would have meant a huge loss in 2008 when stock markets fell, but an actively managed global strategy can move to safety when needs be.
Our advice for pensioners is always to defer as long as possible your state pension and the cash lump sum for your pension. If you don’t NEED it and buy need, I mean pay for hospital bills or to pay the mortgage, there is no need to take it. Whilst you can still work, you should work rather than risk not being able to work later in life through ill health, but you have already cashed in your pension and you end up on benefits and a burden to the system.
Why defer? Well, if you understand compound interest and investing wisely, your pension will grow exponentially and it means most of the gains come right at the end when they start growing faster, so delay your pension as much as you can.
Pension Freedoms for Expats – Pension Cash in Options
If you are an expat, you can have even greater benefits. A Qualifying Recognized Overseas Pension scheme means that when you move abroad, you can take your pension with you. That means that instead of paying taxes in the UK, you pay tax in the country you have moved to and in many circumstances, you can avoid paying taxes altogether.
There is never tax on growth of the pension and often no tax on death. Even if you move back to the UK, you can reduce your UK tax bill by drawing your pension whilst abroad.
Option include moving your pension to Gibraltar, Malta, the Isle of Man or New Zealand. Most of these are former colonies with British style pension systems and protections.
One of the best comments I read from the Guardian was from a retired person on twitter.
“What is clear is that anyone approaching retirement should be seeking professional financial advice and ideally not from their bank. Greater flexibility with pensions is certainly a good thing, but the risk of people decimating their pot within a few years is now a lot higher.”