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Part 3 of 3: Pension reform 2015

Investing for retirement: Using your pension to invest in property

About this article

In this final instalment on the options opened up to investors following the introduction of revolutionary new pension flexibilities, we focus squarely on an investment close to the hearts of many Britons – property.

Bricks and mortar has long been a favoured asset class of UK investors. After all, the post-war ‘baby boomer’ generation enjoyed decades of rising property prices which, alongside valuable guaranteed defined benefit pensions, helped cushion a cosy retirement for many. And from April this year savers aged 55 and over in defined contribution schemes were handed the keys to their pension safe, potentially allowing them to unlock billions of pounds of cash to spend – or invest – as they see fit.

So should investors use their new found pensions freedom to back property again? What are the options? What are the tax charges? And what are the positives and drawbacks of putting some or all of your retirement nest egg in bricks and mortar?

The options

There are two broad options available to people who want to plough their retirement savings into property – keep your money in the pension and use the options available there, or take the money out. Let’s look at these options in turn

Property within a pension

While the reforms introduced in April allow you to strip out your retirement savings to invest or spend, there are options for those who would rather leave the money within the pension tax wrapper. “When it comes to pensions, property generally means commercial property – retail unit, offices and factories,” says Aviva head of pensions John Lawson.

“Your savings are used to buy properties such as these, which are then let out to companies who pay rental income.”

Investors who want exposure to property through their pension can use a Self Invested Personal Pension (Sipp). A number of providers offer these, including Hargreaves Lansdown, Suffolk Life and James Hay. Investors considering this route should consult with their financial adviser before picking a provider as different Sipp firms offer different levels of flexibility and will charge different amounts.

So what choices do people have for investing for retirement through their pension?

“Like other asset classes, it is possible to invest a pension fund in a specific commercial property, although the property must be let on commercial terms,” Lawson says. “For example, you can’t allow your own business to use the property to pay little or no rent.

“And, like other single direct investments, the big risk of investing in a single commercial property is that you are exposed to the fortunes of that one asset.

“For example, it may be difficult to find another tenant if a lease isn’t renewed, and difficult to sell if you need to turn your savings into cash.”

Alternatively, it is possible to invest in property through collective funds, which in turn invest in a large number of different types of commercial property, reducing risk through diversification. “But even with property funds, you may not be able to withdraw your savings as cash immediately if market conditions become difficult,” warns Lawson.

“Like individual property investments, investment managers may be unable to sell properties to meet demand from investors for cash, resulting in the fund being closed to withdrawals for a period.” Investing in individual residential properties is technically possible within a pension but comes with high tax charges. As a result, most providers simply don’t allow this type of investment.

Property outside of your pension

As a consequence of the tax charges mentioned above, the only realistic way to use pension savings to invest in residential property is to take the money out.

But pension income is also taxed in the same way as earned income (although 25% of your pot is available tax free), so if someone is still earning and is close to the higher rate tax band, for example, cashing in some or all of their pension could result in a hefty tax bill.

Martin Bamford, managing director at independent financial advice firm Informed Choice, explains: “You're moving the money from a tax-free environment into a taxable environment; a taxable environment which was made slightly harsher in summer Budget with the gradual removal of higher rate relief on mortgage interest and changes to the wear and tear allowances.

“When you die, the value of the property will fall into your estate, whereas pensions have become very inheritance tax efficient since April.”

Patrick Connolly, an adviser at Chase de Vere, adds: “You will be moving your money outside of a tax efficient wrapper where it will currently benefit from tax efficient growth, no capital gains tax liability and where the money will be outside of your estate for inheritance tax purposes.

“None of these benefits apply if you take the money out and purchase a buy-to-let property.”

Investors should also consider whether their pension is large enough to buy a property – particularly if the pot they are accessing is their only source of retirement income.

Connolly says: “For most people using their pension fund to purchase a buy-to-let property isn’t a sensible or tax efficient option. If they have a large pension fund, enough to buy a property, and withdraw this in one go then they are likely to be hit with a hefty tax bill because after the first 25%, the remainder of their pension withdrawals will be taxed at their marginal rate of income tax. “So, for an investor with a pension fund of £150,000, they could make a tax free withdrawal of £37,500.

Assuming that the remaining £112,500 is all taxed at 40% they would face a tax liability of £45,000, reducing the amount they would receive from their pension to just £105,000. They would also lose their annual income tax allowance of £10,600, further increasing their tax bill.”

Much of this will depend, of course, on the price of the property you are looking to invest in. People with large pensions looking to invest in residential property in less expensive areas, such as Yorkshire or the North East, may well be able to use their tax-free lump sum to buy a property below the stamp duty threshold of £125,000.

Popular option

Brits’ affinity for property is likely to see a splurge of activity, particularly among over-55s, according to research from insurance firm Prudential.

More than two thirds (37%) of homeowners over 55 are planning at least one more property purchase in their lives, with 18% of these planning to buy a property they will not live in. Some 14% of respondents said their property investment plans were a direct result of the pension rule changes introduced in April.

Prudential says the figures suggest over 55s will account for more than three million property transactions worth a total of more than £775bn.

The average maximum purchase price is over £250,000, the Pru says, while one-in-five investors say they are willing to spend £350,000 or more.

The biggest motivation for those planning a property deal is to downsize, according to the research.

Prudential retirement expert Stan Russell says: “There was a lot of speculation that the pension freedoms would spark a rush of over-55s investing in buy-to-let property as a means of investing for retirement. However our research suggests that this hasn’t yet been the case.

“In fact the process of withdrawing cash from a pension fund to purchase property and potentially generate an income is complex and could result in a large tax bill. “Using money raised from a property sale could prove to be a helpful boost to retirement income for some. But it’s no substitute for starting to save as early as possible to prepare for eventual retirement.”


Investing in property, like investing in any asset, comes with risks, so anyone looking to make the leap should think very carefully before putting all their eggs in one basket as, if it runs into trouble, they will potentially be putting their retirement in jeopardy.

There are also complex tax issues for investors to get their head around, particularly for those who are taking their pension out to invest in residential property or buy-to-let – income tax, stamp duty and capital gain tax all need to be considered, so speaking to an expert is highly recommended. Visit to find a local adviser who can help, but ask about their fees before committing. However, a property investment can also have significant benefits.

It has the potential to provide a steady stream of rental income in retirement while the asset – the building itself – could appreciate in value. Furthermore, those with significant pots investing in cheaper areas could avoid stamp duty and potentially benefit from capital growth if the property market continues to boom. For more information about investing for retirement, read part one and part two of this guide.

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