Interest in property investing from UK pension holders is set to see a sharp rise early in the year as market reforms begin, but many retirees are still not aware of their options or the tax implications.
Those that do, may not realise that they are likely to have to pay tax when transferring more than 25% of the total to their bank account.
As property purchases can take two or three months to complete, the real estate sector could see some benefit as soon as early 2015.
The option is now available for those who have saved into a pension scheme and reached age 55 as of April 2015, but the financial freedom for pension savers has a downside.
“For those people that have saved into a pension scheme and reached age 55 as of April 2015, then there will be the option to transfer the whole of the pension fund directly into your personal bank account. The sting in the tail is that tax will be due on part of the pension if you choose to transfer out.
“At present, it is possible to transfer 25% of your pension fund into your personal bank account without any tax and this benefit is set to remain. It is the other 75% upon which tax will be applied.
“Essentially, any transfer of the 75% element to your personal bank account will be taxed at your marginal rate. If you pay 20% tax as most people do then 20% of what you transfer out will be due to HMRC. This also means it is possible to slip into a higher rate of tax very easily by transferring too much out.
“What isn’t always immediately obvious to people is that by being patient and transferring the money into their personal bank account over a number of years could significantly reduce their tax liability.”
Partial transfers each year can help to reduce the tax the pension holder pays and the sum not transferred out can remain invested and grow in value tax-free.
Despite the downside, the changes will mean that millions of savers will have access to money that was previously locked away. “For some this will prove too much of an opportunity to miss out on and the tax due as a result of transferring out will have to be paid.”
But in Spring 2015, the global real estate market could see a big boost, says Mr Bertram. “Interest in property here in the UK and abroad is going to rise sharply in March and April as the dream of buying overseas becomes ever closer. Thanks to these changes, people will now have either a substantial deposit or possibly the opportunity to buy outright. The average pension fund in the UK is approaching £70,000 so someone earning £25,000 would be able to take roughly £50,000 after taxes. This will limit the locations in which they can buy property but they’re locations that didn’t exist before these changes.
“We have an obsession with property here in the UK. So many people have generated their own success stories from investing in property that you can only foresee a surge in buy to let investment. For some very clever investors choosing to transfer out in one swoop, they may even overcome the tax charges easily through better use of their money than if it remains in the pension fund. With the average property purchase taking around 10-12 weeks we could even see interest spark up right from the beginning of 2015!”
Even those who have not reached the age of 55 should start thinking about their options and seek expert advice.
“We find it concerning that so many financial advisors do not disclose all of the options available to potential investors, which include investing in property. Too many people still don’t even know that investing their pension in property is a possibility!”
There are some other strategies that investors can take to avoid tax. “If you run a business and you are a homeowner then you could release up to 75% of your pension tax-free. Another unknown is that if you have close family or friends then you could pool your pensions to give you greater buying power.”
Written by Adrian Bishop, Editor of OPP Connect for OPP Connect