Cashing in your pension fund to buy a property
Pension freedoms made it possible to take a whole fund as cash, tempting some clients to buy a property outright. But once you layer in income tax and Stamp Duty Land Tax (SDLT), the buying power is often far lower than the pension pot value.
This case study shows how a £400,000 pension can shrink to a property budget closer to £260,000 after withdrawals and SDLT, before legal and ongoing costs.
What the numbers really mean – a case study
Fred is 60, lives in England and has a pension fund of £400,000. He has no other income this tax year and has not used any of his lump sum or lump sum and death benefit allowance.
He would like to explore his options of using his pension fund to purchase a buy-to-let property. He thinks this will be a good option for his retirement and has been looking at properties around £400,000.
If Fred takes an uncrystallised fund pension lump sum from his pension fund, he will receive £278,797 after tax. He will receive 25% (£100,000) tax-free and the remaining £300,000 will be taxed at his marginal rate of income tax as follows:
| Tax rate | Amount taxed | Tax due |
| 0% | £01 | £0 |
| 20% | £37,700 | £7,540 |
| 40% | £37,700 - £125,140 | £34,976 |
| 45% | £125,140 - £300,000 | £78,687 |
| Total tax | £121,203 |
1 Fred will lose his personal allowance as his income in this tax year will be above £125,140.
Fred is looking to buy the property in May 2026. The stamp duty payable on a property of £278,797 will be £17,879.
| Duty rate | Duty band | Duty due |
| 5% | Up to £125,000 | £6,250.00 |
| 7% | £125,001 to £250,000 | £8,749.93 |
| 10% | £250,001 to £278,797 | £2,879.60 |
| Total stamp duty | £17,879.53 |
So, from Fred’s pension fund of £400,000 he will be looking at properties around the value of £260,918 (£278,797 - £17,879) rather than £400,000 taking into account the income tax and stamp duty he will need to pay.
Fred has lost over a third of his fund through taxes and stamp duty. In addition to these costs there will be legal fees, refurbishment costs and any other costs associated with property purchase.
Future taxes and costs
It should also be remembered if Fred makes any profit while renting out his property, this is taxed at his marginal rate of income tax. So, any profit he makes from the rental property in the same tax year as taking the uncrystallised fund pension lump sum, will be taxed at 45%.
Any gains made on the property, if he sells it, will be subject to capital gains tax as this will not be Fred’s main residence.
On Fred’s death the value of any buy to let property will be included in his estate. The main residence nil rate band will not apply to a buy to let property.
It’s quite clear using an uncrystallised fund pension lump sum to purchase a property should be considered carefully due to the taxes payable and other costs involved. Not only at the time of taking the uncrystallised fund pension lump sum and buying the property but into the future as well.
Further information
Disclaimer
The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.
All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.