Should you invest in property with your pension pot?

With interest rates remaining low and the opportunity to grow your money with investments ever present, is it wise to invest your pension in buy to let property?

The figures suggest that those with sizeable pensions are looking at property investment to make their money go further. In fact, £2.4bn has been taken from pensions over the past three months, more so than we have seen in decades beforehand.

A recent poll has revealed that three in ten adults between the ages of 45 and 54 said they were strongly considering taking money out of their pension pot to fund buy-to-let property.

Why are we seeing this shift?
The change has come largely due to the introduction of pension freedoms as recently as 2015, with people being able to access their funds from the age of 55 without needing to buy an annuity. Of this, the first 25% can be taken out cash free.

HMRC revealed that a massive £2.4bn has been withdrawn from pensions between July and September of this year, this being a 21% increase on the previous year during this period.

On a more concerning level, almost half (48%) had taken out the funds without regulated financial advice. This opens up the possibility of people making uninformed, risky decisions over how far their pensions will support them.

A need to be careful
A case for caution and something that many should consider before opting to make this decision, you would need to pay income tax, should you to take a substantial amount out from your pension.

This figure is not a small amount either, in fact were you to take out £400,000 from your pension, you would need to pay a massive £120,000 in income tax.

Combining this figure with the current 3% stamp duty surcharge for owning an extra property, plus any additional costs associated with setting up a successful buy to let property, the chances are you will not receive a good return on your money.

Of course, with many people opting to go this route, many of which are experienced property investors, there is some potential here. You need to consult with a financial advisor if you are still interested in going this route.

The benefits of property investment
Property has historically proven to be a strong investment asset, with many considering it the safest investment you can make.

With savings accounts also stagnating at low levels of interest, property represents excellent value when compared to traditional investments. On top of this, there are many ways you can invest in property.

Whether you opt to invest through a standard buy-to-let, ‘flip' a property or by funding property developers in the form of loan notes, the opportunity to earn in the short, medium or long term is one of the major benefits of the new wave of property investing.

Do your research beforehand
The market has indeed slowed down in recent years, which is good and bad for new property buyers.

House prices have slowed on average to 1.3% compared to 2.7% in 2018, with some houses even losing value relative to the rate of inflation. Whilst this does of course mean you can secure a good price on property; you will need to be cautious of both the property type and the location of the property to ensure you do not fall victim to loss of value.

Securing the right property and targeting the right demographic can enable you to make a profit on your investment. Research suggests that savers taking out £400,000 or more can make a return on their property investment, this being covering the total of income tax and stamp duty, in as little as five years.

This may well be a slightly ambitious target, but many would agree that returns can be made here. With rental yields and capital growth still very much evident in many areas across the UK, particularly Northern cities such as Manchester and Liverpool, so long as you have done your research and sought professional advice along the way, there is a great chance that you will get a return. You will now also have a passive income for as long as you own the home.

Should I make the move?
Ultimately this is up to you. There are risks involved but also benefits so long as you have done your research. With such a large amount of income tax to pay through accessing via your pension, we would recommend sourcing alternative finance for this where possible.