Using Pension Lump Sum on Buy-to-Let Property

When you reach your fifty-sixth year, you can withdraw a large portion of your pension in cash. The question many ask themselves is “should I use this money to invest in property?”.

The most common barrier to investing in a buy-to-let property is not having the necessary liquidity to pay the deposit, usually 25% of the asking price. But the pension lump sum can be the answer to this problem. And you don’t necessarily have to wait until you retire.

In this guide, we explain how to use your pension lump sum to buy a house, and explore whether it’s a better option than other retirement products.

Pension Lump Sum Rules

Back in the 2015/16 tax year, Chancellor George Osborne released the shackles on our private pension schemes. Gone were the days when everyone used their pension pot to buy an annuity, giving a steady, albeit low, income for life. Instead, we can now access cash to use as we wish.

So long as you are 55, you can release your pension pot, whether you are still paying into it or not, and take as much of it out as you like. There is a big but here (isn’t there always?), and that’s while the first 25% of what you take out will be tax-free, you must pay whatever your tax rate is for the remainder.

That could put a big dent in your plans before you spend a penny of it. But still, the lure of a pile of cash remains, and it’s something you could put to good use. And 25% of your pension could still be a very useful sum. 

As ever, you should seek independent financial advice before making any decision like this. Everyone’s circumstances are different, and your financial planner might spot reasons why it is better for you to leave your funds where they are. Much of it will depend on how your finances stack up and what your goals are for retirement.

How to Access a Lump Sum to Buy a House

If you have taken advice and wish to proceed, then do some research on the rental market first. Be clear about where you want to buy, how much you should pay for a house and how much rent that property will give you. Do you wish to buy a well-maintained property, or are you willing to get your hands on a “doer-upper”, a home that needs refurbishing or renovation?

Once you have a grasp of all the above, only then will you have an idea of the scale of buy-to-let mortgage you need, and with it the size of the deposit that must come from your pension pot.

Speak with your adviser about whether to go for an interest-only mortgage or a repayment option. Interest-only costs much less each month, giving you more income, which is probably your primary goal. But you won’t pay off the mortgage that way. This is not necessarily a problem, as we shall see.

Can I use a lump sum as a house deposit and get a mortgage while retired?

Yes, you can. Whereas a lender might not want to give you a new residential mortgage in retirement, a buy to let is a different proposition. It is there as an investment, and your age (and physical health), makes no difference to the monthly income it generates to pay off the mortgage.

While you could use your pension pot to fund a buy to let after you retire at, say, 65 years old, nothing is stopping you doing this as early as 55, when your lump sum powers come into play. 

Imagine taking out a repayment buy-to-let mortgage at 55 when you are still working, so not relying on the rental income. The tenant is paying off your mortgage, so when you do retire, you might have paid off all or most of the mortgage. You can then simply keep collecting the rent every month and put it toward your wider retirement income, and combine it with other retirement products, such as an annuity or drawing down from stock investments. 

Buy-to-Let Versus Other Pension Products

No investment path is clear cut: that much is obvious. As you might expect, there are pros and cons with buy-to-let investment and they should be compared to other pension products.

Buy-to-Let Properties

Pros

• A regular monthly income that will rise over time (as you pay off your mortgage, and if rents continue to rise above inflation in the UK, as they generally have for 30 years)
• Capital appreciation if the house prices rise – so, you might end up selling for lots of capital (minus capital gains tax). Or you could use the equity to refinance and raise enough for a deposit on another investment property
• When you die, your rental property is part of your estate and can be passed down to your family

Cons

• While most tenants are easy to deal with, some might be less so. You must be prepared for the occasional headache during retirement
• Be prepared for void periods between tenants. There may be the occasional month or two when you get no income, plus you must pay for tenancy set up.
• You must pay to maintain the property to a fit standard for tenants, plus pay for ongoing checks like gas safety certificates and electrical certificates
• House prices might deflate. You will still receive your rental income, but it would erode the value of the equity you have in the property, meaning you get less when you sell it and can raise less money by remortgaging.

Annuities

Take up to 25% of your pension pot tax-free, then buy an annuity with the rest.

Pros

• An annuity gives you a guaranteed income for life. You will be paid the agreed amount for as long as you live, which is great if you lives for many years past retirement. 
• It makes budgeting throughout your retirement much easier.

Cons

• When you die, your annuity usually disappears, too – even if you passed away after a year or two. 
• The amount you get is much lower than it was in years gone by (a good reason why the popularity of the annuity has gone through the floor).
• While you can sell your annuity if your circumstances change, you are unlikely to get good value.

Stock/fund drawdown

Investment funds are now a popular retirement option. You save into a pot, which grows as fund managers invest your money. When you come to retire, you take an income drawdown from the pot. It means the pot can continue to grow and you can skim off the growth each year without it reducing — although you may wish to draw down more than just the growth. 

Pros

• A good income if you are with a sound investment fund.
• Depending on your drawdown rate, your capital may not diminish and might still grow despite your drawdowns.
• You can leave your capital to a loved one when you die.
• This option works well if you take some of the funds as a deposit for a buy to let and keep the rest for drawdown purposes.

Cons

• If your fund performs poorly, so does the amount you can withdraw (although funds are invested in a diverse range of stocks, bonds, and commodities like gold to minimise the risk).
• Most investment funds have high management fees, although low-fee online competitors are already gaining market shares, and by the time you retire, fees may have dropped even further. 

Cash

Cash always used to be king, but is it still?

Pros

• Access to instant funds lets you move fast on a project or investment.
• Very simple and no management needed; you always know how much you have.

Cons

• Interest rates on cash are at their lowest since the advent of modern monetary policy, and show no signs of picking up. 
• Cash is prone to being devalued if inflation rises. 

Buy to Let Might be a Sensible Option

Having examined your options, you might see that using part of your pension pot to fund a buy-to-let mortgage could be a good addition to your pension planning. If aligned with an investment fund from which you can draw down a regular income, this could be an optimal way to enjoy your retirement.

And if you tire of managing a tenancy when you get older, you can always sell it, then direct the equity you have built up in it into your investment fund, or just enjoy the cash. 

Whichever way you are leaning, be sure to get good financial planning advice, and don’t rush into anything.

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