With more of us living longer, saving for the future has never been so important. But when building your retirement pot, it’s good to diversify to mitigate the risks of investment.
Alongside stocks and shares, property - with its regular rental income and long-term potential to rise in value – could be a great option.
Here are three ways property can boost your pension.
Property has long been a popular investment to provide a retirement income. Rents have been rising steadily over the years, and this regular income could provide a tidy sum into retirement.
You may choose to buy an investment property long before retirement, or, since the introduction of pension freedoms in April 2015, opt to cash in retirement savings to buy bricks and mortar.
However, recent tax changes and the whittling away of mortgage interest relief to the basic rate by 2020 are making buy-to-let a less appealing prospect.
You’ll also have to stump up extra Stamp Duty, with a 3% surcharge imposed on second homes. And you’ll also need to pay the income tax on any rent you take, alongside capital gains tax on any rise in the property’s value when you sell.
Read more: 5 ways to beat buy-to-let changes
But you don’t have to bother with the increasing hassle of being a landlord, as there other ways to invest in the buy-to-let mortgage.
For example, through Zoopla partner Bricklane.com, you can slot residential property into your pension pot by investing in a special fund.
You can invest from £10,000 in a Bricklane fund through a self-invested personal pension (SIPP)*. A SIPP is a particular type of pension wrapper thatn enables you to choose your own investments.
(HMRC rules won’t allow direct residential property investment within a pension, but it can be done indirectly through a special Real Estate Investment Trust (REITs) that is allowed to be held in your SIPP.)
How it works is simple.
Your money is used to buy a slice of several properties, with returns coming from rental income and the rise in the value of the property (if the property value rises).
You can invest in a fund that buys property in London, or the Regional Capitals fund that invests in Birmingham, Manchester and Leeds.
You’ll benefit from the typical pension tax advantages - a 20% boost from the Government on pension contributions, and you don’t have to worry about changes in tax rules, or tenancy issues because your fund is managed for you.
If you invest above £25,000 in Bricklane.com through its partnership with Hartley Pensions, you won’t pay any SIPP set-up or ongoing costs that typically amount to a set-up fee of £125 plus VAT, with an annual admin charge of £175 plus VAT.
As with all investing, your capital is at risk. Tax rules apply, and these may change in the future.
2. Equity release
You could get to retirement and use equity release to free cash from your property. Using this option, you can spend your home’s value while you’re living there. But rules apply. For example, you’ll need to be age 55 or over to use an equity release scheme.
Of course, there’s always downsizing if you want to cash in on some of your home’s value – but that’s not for everyone, particularly if you’ve got a large family, and time to spend with them in retirement.
Under equity release, you are loaned money that’s repaid once you die. The younger you are, the less you can typically borrow, with rates often fixed for the life of the loan.
The loan will either be repaid from your home’s sale after death, or once you move into care and your property is sold. If you sell your property before then, you’ll need to pay back the debt.
Some providers will ask for monthly interest payments, which can help to protect the value of your home. But bear in mind that rates for equity release are usually far higher than standard mortgages, and you may not find this route to funding your retirement is the right one for you. It’s important to weigh up the pros and cons, and seek professional financial advice.
If this is an option you’re looking at, there are a growing number of equity release providers, so do your homework and make sure you opt for a member of the Equity Release Council – equityreleasecouncil.com. This will ensure your plan meets certain rules, such as not allowing you to owe more than the property is worth on death.
3. Rent out a room in your home
You have been able to earn £7,500 tax-free each year by letting out a spare room in your home since April 2016. This could be a useful cash injection to your pension pot – and it’s a large rise on the £4,250 relief that had been frozen since 1997.
To boost your income further, you could offer other services, such as meals at home and cleaning. But bear in mind that this will need to be included under your Rent a Room allowance.
You may let up to an entire floor if your home is big enough. But that’s provided the accommodation is furnished, and it’s your main home. The allowance won’t apply if you’re renting space, such as an office, but not living there.
You might also be interested in...
- Pros and cons of investing in property
- How to become a property investor with £100
- Beat the rising cost of Stamp Duty
This article does not constitute financial advice. If you are unsure about whether investment is right for you, you should seek independent advice before investing, including tax advice.
*A SIPP isn’t right for everyone. Tax rules and allowances depend on individual circumstances, and may change in the future.
Zoopla Limited is an introducer appointed representative of Gallium Fund Solutions Limited (Reference number: 487176) which is authorised and regulated by the Financial Conduct Authority.