Following the changes to pension rules in last month’s Budget announcement it has been speculated as to whether this will increase the number of people taking advantage of these changes to get into Buy to Let.
In the biggest pensions shake up in almost a century, George Osborne announced that people will now be able to take up to 25% of their pension fund as a tax-free lump sum, and the balance of the pot as a lump sum which will be subject to tax. This has led to some industry experts suggesting that this ability to take the full pot will lead to increases in investment in Buy to Let in order to maximise returns.
However there are a number of factors to be considered in comparison to, for example, an Annuity, which was the route many pensioners took before the changes.
A key consideration is the level of tax that will be paid on the sum withdrawn to invest in a property – as anything above 25% of the pot will be subject to tax. In contrast, investing in an Annuity allows tax-free investment of the full amount, although the annuity is subject to tax.
Another key advantage of an Annuity compared to property investment is that it is a guaranteed source of income, whereas there is obviously no guarantee that you will find a tenant to let the property, as well as it being likely there will be additional costs related to maintenance.
While there is the option of inflation-linked Annuities, many people opt against this choice. Therefore, in general, the income level of an Annuity will remain the same throughout retirement without taking into account inflation. However, with Buy to Let there is the potential to annually increase rent, offsetting the effects of inflation. In addition Buy to Let offers the option to sell the property in the future, whereas once an Annuity has been bought there is no going back.
It is also worth taking into account the simplicity of an Annuity; once it’s paid for it requires little attention. The opposite is true of Buy to Let, where the property and tenants will require constant attention, communication and maintenance.
So, which is ‘better’?
Of course, there are advantages to each option, as explained above, and each person’s differing circumstances will affect the overall outcome. However, in general, Buy to Let should be seen as a higher risk option, which will require more input and there is no guarantee of any higher returns.
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Buy to Let mortgages are not regulated by the Financial Conduct Authority.
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