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Cashing in your pension fund to buy a property
Since the introduction of pension freedoms, it has been possible to take a full pension fund as cash regardless of the value.
Some people see this as an opportunity to use the proceeds from their pension to buy a property as an investment.
When you look at the figures though, you quite quickly realise the value of the property you can buy is much lower than the value of the pension fund due to the tax and stamp duty you will need to pay. This is best displayed using 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 April 2024. The stamp duty payable on a property of £269,719 will be £9,077.
| Duty rate | Duty band | Duty due |
| 3% | Up to £250,000 | £7,500 |
| 8% | £250,001 to £925,000 | £1,577 |
| Total stamp duty | £9,077 |
So, from Fred’s pension fund of £400,000 he will be looking at properties around the value of £269,720 (£278,797 - £9,077) 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 receives any rental income this is taxed at his marginal rate of income tax. If he receives any rental income in the same tax year as taking the uncrystallised fund pension lump sum, this will be 45%.
Any gains made on the property 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.