Interview: Is it Possible or Prudent to Invest in Property with a Pension?
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with Kristen Durose
Kristen Durose is the managing director of Red Star Wealth Management, a company of independent financial advisers based in Blackpool, Lancashire. You can see her company website here.
Since 2015 people have had a lot more freedom to decide what they want to do with their pension but is using it to invest in property a viable option? The answer is yes but there are restrictions. Releasing your pension entirely has tax implications and you can only invest in commercial property with your fund.
Common Questions About Investing In Property
Amy: Something I'm interested in, Kristen, is what are the common questions that you're getting asked about investing in property?
Can I Use My Pension To Buy A Property?
Kristen: One of the big questions that we get asked is, "Can I use my pension to buy a property?"
There are two strands to this question.
Firstly, there are people who want to take all of their money out of their pension and go and buy a property with it. This is a common idea following the introduction of Pension Freedom, in 2015.
And secondly, we get asked a more straightforward question which is, "Can I use my pension fund to go and buy a property?"
Pension Freedom, 2015
Kristen: So, taking the first question. After Pension Freedom came in, the idea came to people that you could withdraw all of your pension funds, without restriction and use it to buy a house.
As we have alluded to before, people like to invest in bricks and mortar and prefer that to something they can't see and touch like a pension fund.
And so a question we get is, "Can I take all of my pension money and go and buy a house?" and the simple answer to that is yes, you can, as long as you're prepared to pay the tax on it.
Because if you withdraw all of your pension funds it is added to your income for tax purposes in the year that you take it. So, if you withdraw a pension fund of £100,000, a £100,000 is added to your income for that year and taxed accordingly.
So, the chances are you're definitely going to pay 40 percent tax on some of it, you might pay 45 percent tax on some of it.
It isn't as simple as withdrawing money as you would from a bank account, unfortunately. So, this fact does tend to stop people using their pension fund, in that way.
Using Your Pension To Buy Commercial Property
Kristen: The second question, "Can you transfer your pension into property?" is yes, as long as it's a commercial property.
There was a rumour, some years ago, and I think people still talk about today, that you can buy residential property with your pension. You can't.
You can buy an office or warehousing but you can't buy a residential property, a hotel or anything of that sort.
The Benefits To Using Your Pension To Invest In Commercial Property
Kristen: If you do decide to use your pension to buy a commercial property, there are some real significant benefits.
For example, when you sell the property you won't get charged any capital gains tax because it's part of your pension. Also, any income that comes in through rental goes into your pension and isn't taxed because your pension is a tax-free vehicle.
There are, obviously, restrictions, when you get the money back out again. But there are some significant benefits including the fact your pension can borrow money in order to help you buy.
So, there are benefits.
And, if it's a commercial property that you're looking at, particularly if it's a commercial building that you're going to operate your business out off - your company will be paying the rent for the building that your pension fund owns - it may look very attractive.
We help clients a lot with setting up this kind of arrangement. That's one of the specialities of our firm that we that we help people on that.
But it's got to be understood that it can't be a residential property.
I have 27k in a pension pot I’m 38 and want to know if it is possible to use on a house deposit?
I have a frozen final salary pension with my previous employer i also have a personal private pension that i still pay in to. I am 49 years old and I want to buy a commercial office building that is comming up for auction that I live next to. Is there any way I can use the funds to finance the purchase? The guide price is £150k and I have about £200k+ in pension funds.
Many Thanks
Hi Richard,
Best to check in with your accountant or tax advisor directly on this.
I have a pension with Aviva and I have tried asking them to allow me to use my pension to invest or buy a property but they have consistently told me that they will not allow the use of the funds. Based on the pension regulation I am not allowed to touch the funds until i’m 55, I have stoped paying money into the pension simply because I feel I am only trapping my funds. What can I d to get my money from them?
Hi Mr Mitchell, a good next step might be to discuss with an IFA or Accountant the terms of your pension and how and when you can plan to use it and use the funds in the existing pension if that is indeed possible.
I’m now 57 so my pension pot is available to do with it as I deem fit, however I’m not as yet ready to retire fully and I was wondering if the purchase of student accommodation falls in to commercial so benefiting from the tax arrangements around commercial property or would they in reality be classed as residential properties which I fear they will be?
Another option I’m considering is the purchase of a small DIY store with accomodation on top and with workshops etc. Again I’m unsure as to what category these would fall into?
Any advice is appreciated
Hi there
Can I buy land with my pension funds then build residential properties on it?
And can I buy a commercial property and make it into residential use after purchase?
Thanks
Can I use som of my pension to give to my wife who is disabled with no income therefore pays no tax.She wants to run. A guesthouse and would like to use this money to do this. It’s only 80.000pounds.
Hi, I wanted to release my pension, to start up a service accommodation business. Is this type of venue classed as a residential or commercial property?
Can I invest my pension in this way?
Hi Charmian,
This would be one that’s best to discuss with your accountant as they should be able to advise based on the right requirements for the pension use if you need to invest in via a limited company structure
Hi Charmian,
Whether your pension can fund this type of venture would depend on whether it was classed as commercial property unless by “release” you mean take your pension fund out in which case if you did that you can spend the money on anything you want however you cannot take out funds from a personal pension until at least age 55 and there are significant other implications involved not least the tax position.
It would be best to get some independent advice on this one
Regards
Kristen
Hi
I’m thinking of using my pension to buy some agricultural land. Do I need to have a specific type of pension in order to do this?
As you maybe aware you can purchase land, including agricultural property (but not including any residential accommodation, apart from where a specific exemption from the taxable property rules applies) using your pension. You are likely to need either a self investment personal pension (SIPP) or a small self administered scheme (SSAS). You should seek advice on which is better for your personal circumstances. I hope this helps.
I am looking to buy a residential property that has two holiday let’s. For this type of property I am told I need a commercial mortgage.
Can I use my pension fund to invest in this?
Hi Chris,
Based on the type of occupancy you may need commercial lending on top of that if you are looking to use your pension then it may be specialised funding that you require, either way the best next step would be to speak to some brokers on what financing is suitable and available,
You can access all our black book of contacts in our Fast track training course which includes a list of mortgage brokers that have experience with buuy to let mortgages, commercial financing and also bridging finance, and it also comes with other content too. You can see the full details here – https://www.propertyinvestmentsuk.co.uk/fasttrack/
Hope that helps
Hi Chris
It is unlikely you would be able to use your pension fund to purchase holiday lets as they are classed as residential properties even though for you it would be a commercial venture. You might mean that you intend to take money out of your pension to make the purchase but this throws up many questions not least how old are you? and how much tax you might have to pay. If you do mean the latter I would seek independent advice before doing anything.
Kristen