How to be a property investor: Property vs pensions

Published by Emma Lunn on 07 June 2016.
Last updated on 15 June 2016

House made of money

New pension rules which came into effect last year give retirees much more choice about what they can do with their pension pot.

Before April 2015 pension savers had little choice but to buy an annuity on retirement. Now they have the option to withdraw their pension as cash or leave it invested in the stock market. Read our guide to the new pension freedoms.

The pension rule changes came at a time when property investors were boasting impressive returns. Property has outstripped every asset class over the past 20 years and is showing no sign of slowing down.

However, there is one big issue to consider before you cash in your pension to join the buy-to-let brigade: tax.

Those aged 55 and upwards can take 25% of their pension as a tax-free lump sum. However, further withdrawals will be taxed at an individual’s marginal rate of income tax and this can mean a hefty tax bill for many.

For example, if you had a £200,000 pension pot you could take £50,000 tax-free. If you were taxed at 40% on the remaining £150,000, you’d pay the tax man £60,000.

Income tax aside, money in a pension has no capital gains tax liability and the money is outside of your estate for inheritance tax (IHT) purposes. None of these benefits apply if you take the money out and purchase a property.

Buy to let tax changes

Meanwhile there have been some major changes in the tax treatment of buy-to-let. Since April 2016 landlords and property investors have been paying a 3% surcharge on existing stamp duty rates.

Investors buying the average property costing £292,000 now pay £13,360 in stamp duty compared to just £4,600 if they’d bought the property before 1 April.

There are also changes to the way rental income is taxed on the way. From April 2017 the Government is slashing the amount of tax relief on mortgage payments landlords can claim to the basic rate of 20%. The changes will be phased in from April 2017. Landlords who pay basic rate tax won’t see a change, but those on higher incomes will lose out.


Tax is the main reason financial advisers generally advise against cashing in a pension pot to buy a rental property. Some go as far to suggest landlords make the move the opposite way by selling buy-to-let properties to put money into their pensions.

Beware of the buy to let “hassle factor”

However, it’s not just tax retirees need to think about when weighing up the pros and cons of buy-to-let. Despite suggestions from some quarters that landlords earn money for nothing, the opposite is often true. Unlike investing in the stock market, buy-to-let is far from a passive investment.

Obviously the first step for landlords is to find the right tenants. After that there is collecting the rent, maintaining and repairing the property, and dealing with any issues that arise. And that’s just when things are going well. Unfortunately buy-to-let can turn into a nightmare if tenants fail to pay the rent or damage the property. Non-paying tenants can take months to evict and all the while the mortgage will still need to be paid.

So, far from providing retirees with a hassle-free income in retirement, in some cases buy-to-let can become a tiresome burden.