WILL pensions liberation next year spark a rush into buy-to-let?
A Scottish property management company has drawn up a blueprint for anyone tempted to invest their pension savings on a mission to become a later-life landlord.
Since George Osborne's shock Budget announcement that from next April over-55s would be free to spend their defined contribution pension pots any way they liked, many have predicted it will suck more assets into property.
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But David Alexander, principal of letting and estate agency DJ Alexander, says retirees may not always make good landlords.
"Someone who is newly-retired, or nearing retirement, will clearly have a different perspective on buy-to-let than someone in their twenties, thirties or forties. For example, a pensioner will not have a regular salary to fall back on if the investment goes wrong, and there may be dangers in tying up all of one's capital in a property - issues unlikely to apply to a younger person with a good income. There are also separate tax issues to consider although the biggest consideration of all could be 'do I want to get into this at my time in life?'"The firm's checklist for the over-55s is:
l Even with expert help, buy to let property is rarely entirely hassle-free so consider your ability to handle the pressure.
l If you still want to go ahead, a property in need of some refurbishment will likely provide the best overall return as it will be less expensive to buy and can be improved relatively inexpensively. As for property in 'move in' condition, 'traditional' will show better capital growth than 'modern' although the latter is less likely to have repair and maintenance issues.
l If choosing refurbishment, someone of your age should, ideally, have relatives and friends prepared to 'pitch in' with the work, or have sufficient funds to pay for reputable contractors.
l If you are nervous of going it alone, consider a shared purchase with younger members of the family or even a joint venture with a newly-retired friend
l Remember location is everything - a two-bedroom flat in a top area will almost always provide a better overall return than a four-bedroom one in a mediocre area. Set personal taste aside, you are not buying a 'second home' but making an investment.
l Take into account rental void (periods when a property lies unoccupied, usually due to a changeover of tenant). Depending on seasonal vagaries, rental void in any one year could be anything between one and eight weeks. Also set aside part of rental income for repairs, maintenance, buildings insurance, management fee and, increasingly, the cost of annual certificates required of landlords.
l If selling on, consider the implications of capital gains tax (CGT). Investors in stocks and shares can spread profits over several years to avoid or at least minimise CGT whereas this is not possible with a property sale if it produces a large enough surplus. Currently the annual threshold is £11,100, and anything above that is taxed at a standard rate of 18 per cent or 28 per cent for higher-rate taxpayers.
l Remember a property bought with a pension pot is a capital asset, which the authorities can compel you to use to contribute to care or nursing home costs.
l But you can bequeath a property on death. Currently the IHT rate is 40 per cent on all assets over £325,000 (unless passed on to a surviving spouse).
l Remember all income over £31,865 per annum is currently taxed at 40 per cent.
l Don't tie up your entire pension fund in property.
l Be honest with yourself. While property offers the security of savings plus the more favourable returns associated with the stock market, it requires more effort.