Cashing in your pension fund to purchase a property

Since pension freedoms were introduced it has been possible to take a full pension fund as cash regardless of the value. Many individuals see this as an opportunity to use the proceeds from their pension to purchase a property as an investment. When you look at the figures though, you quite quickly realise the value of the property you can purchase 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 year.  He would like to explore his options regarding 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 a UFPLS from his pension fund he will receive £280,000.40 after tax.  He would receive PCLS or tax free cash of £100,000 and the remaining £300,000 would be taxed at his marginal rate as follows:

Tax rateAmount taxedTax dueTotal tax
0% 0* 0  
20% £37,500 £7,500.00  
40% £37,501 - £150,000 £44,999.60  
45% £150,000 - £300,000 £67,500.00  
      £119,999.60

*Fred will lose his personal allowance as his income will be above £125,000.

The stamp duty payable on a property of £280,000 would be £12,400.

Duty rateDuty bandDuty dueTotal stamp duty
3% Less than £125,000 £3,750  
5% £125,000 - £250,000 £6,250  
8% £30,000 £2,400  
      £12,400

So, from Fred’s pension fund of £400,000 he will be looking at properties around the value of £267,600 rather than £400,000 taking into account the income tax and stamp duty he will need to pay. 

Fred has lost one 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.  If he receives any rental income in the same tax year as taking the UFLPS, 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 a UFPLS 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 UFPLS and buying the property but into the future as well. 

Note

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.

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The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.