Brokers unanimous: Tax advice essential when using pension funds on buy to let

They were responding to research by YouGov on behalf of Royal London showing that 15 per cent of people aged 55 and above would consider investing money from their pension in BTL to fund their retirement. The proportion rises to 29 per cent among people aged 45 to 55.

The government changed the tax rules in April 2015 to give people greater access to their pension savings.

Analysis by Royal London indicated that a person living in England or Northern Ireland withdrawing their whole £400,000 pension savings as a lump sum would be liable for £120,000 income tax and potentially second home stamp duty of £12,400 when purchasing a property — resulting in a final cash fund of £267,600.

In Scotland, the same sum would be worth £261,407 and in Wales £267,650.

“The flexibilities brought in with Freedom and Choice have prompted many retirees to consider taking their pension as a lump sum to purchase a BTL property” said Fiona Hanrahan, business development manager at Royal London.

“However, by doing this they risk being clobbered with tax to the extent that they are unlikely to be able to afford the property they were hoping to buy and would need to look at something smaller.

“We would urge anyone thinking of going down this route to speak to a financial adviser to go through their options,” Hanrahan added.

Mortgage advisers’ role

And mortgage brokers agree.

At Alexander Hall, director of lender relationships and new homes Greg Cunnington said that with property considered a safe asset in the UK, the firm regularly sees clients “looking to either retain or invest in BTL property as part of their future and estate planning.

“This includes clients looking to use pension funds, albeit normally only a portion of the fund.”

Cunnington explained that the firm would not point out specific tax risks because it was not its place to do so.

“It is an advisers’ role to ensure we give our clients good quality advice on all elements of the mortgage and the mortgage process,” Cunnington said.

“However we have to be careful to not fall into giving tax advice, and indeed sometimes a little knowledge can be a dangerous thing that we must ensure we do not fall foul of.

“In this scenario we must absolutely ensure the client has spoken to somebody who is qualified to give appropriate tax and financial planning advice,” he added.

First, take tax advice

However, with the average size of pension pot in the UK thought to be around £50,000, many brokers say it’s unusual to find clients looking to invest in this way.

“We generally see wealth that’s derived from somebody’s trading business or employed income. That’s typically our type of client. We haven’t seen a huge amount where people have taken a lump sum from the pension pot and bought themselves a buy to let,” said Matt Hardman, director at The Buy To Let Broker.

“If they’re toying with the idea of doing it, we’d always say ‘go back, talk to a fully qualified independent financial adviser, somebody who’s very au fait with pensions and knows what the implications are of drawing the money down.

“If they have made a decision and the money’s already been drawn down, at that point we’d advise them on the mortgage,” Hardman said.

At Mortgages for Business, director Steve Olejnik agreed his firm would always direct a client in this type of situation to tax adviser before starting the conversation about mortgage options.

“If we’re approached by a client saying ‘I’m thinking of using my pension,’ we would always direct them first to a tax adviser because we don’t see that as part of our remit and wouldn’t want to give any wrong tax advice

“It’s built into our process that anything like that we direct to a tax adviser,” says Olejnik.

Taxation minefield

He added this would likely be the case for all clients and not only for those looking to use money from a pension, because tax rules on BTL have recently changed.

“They’d potentially need to look at setting up a company to buy a property. Then they’d have the tax implications of the money going from them into the company.

“And they’ve got the responsibility of being a landlord with all the new rules and regulations that come with that,” Olejnik said.

“We can talk to them about the finance options available and the high level of what it’s like to be a landlord and what the BTL market is doing.

“But whether that’s in line with their particular individual tax status is something we’d make sure they take specialist advice on,” Olejnik added.

Liz Syms, chief executive at Connect for Intermediaries, took the same view.

“If the client approached us having already decided to use pension money, say as a deposit, we’d simply recommend they take advice first from their pensions adviser and also their accountant or tax adviser. It’s not our place as mortgage advisers to stray into this area of advice,” she said.