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Investing In Property For Retirement

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Retirement is often the catalyst for property investment in more ways than one. As well as people turning to bricks and mortar as a nest egg for their golden years, there is also a growing number of retirees who are developing buy-to-let portfolios in later life. So, what are the key things to consider when you are thinking of investing in property for retirement?

Why do people look to property as part of their retirement plans?

One attraction to investing in bricks and mortar in retirement is being able to see the physical asset, which you can’t in the same way with a pension. Even the most senior economist in the UK – Andy Haldane from the Bank of Englandstated his preference for property investment as the best way to save for retirement, sparking a debate about whether property or pension was the best route. For many, property investment is one aspect of their savings strategy for retirement and, for those who have already stopped working, an attractive way of supplementing their income.

What are the best properties for retirees?

The best type of property in which to invest depends on your individual circumstances, and depending on how far into retirement you are, what you hope to gain from your investment.

If you’re investing ahead of or just at the start of retirement, you might be looking to invest, first and foremost, in a property for capital gain. Therefore identifying properties that are most likely to appreciate in value in the longer term will hold more appeal. While there are no guarantees as to where prices will head, properties in locations that are receiving substantial investment, such as major infrastructure projects or key city regeneration zones, are more likely to see an upturn in both house prices and rental values.

However, for some mature investors, the focus may be on securing regular rental income, so a location with established tenant demand will be important. Consider places close to good transport links and large employers, such as universities and hospitals, where there is a ready-made market.

Consider also what type of property is likely to be in the higher demand and by who. If you’re buying in or close to a city, then apartments may be the most sought-after properties and, depending on the area demographic, it may be that a property suitable for sharers is the best buy.

What returns can I expect?

Typically, rental yields sit around the 4-5% mark. However, you can achieve returns as high as 10% from the most desirable properties in up and coming locations. For those looking to build a property portfolio, it can be wise to invest in several different locations with a mix of established and up and coming locations.

Funding your investment

If you require a mortgage, you will need a special buy-to-let product and it is wise to do your homework to ensure you find the provider to best suit your needs. For instance, how quickly do you envisage paying off the mortgage? Are you planning to build up a portfolio of properties? While some retirees may have savings to invest in their property purchase, there are a growing number of buy-to-let mortgage products available to older borrowers and, again, it pays to shop around.

Retired property investors may also look to take advantage of their 25% tax free lump sum they can release from their pension fund to part or fully fund their property investment. However, it is wise to seek professional advice on how to best structure the investment in the most tax efficient way

What tax considerations should I be aware of?

There are a number of tax-related considerations when investing in buy-to-let property. New rules came into effect regarding stamp duty on second property ownership in 2016, which need to be factored in to the overall purchase price:  a 3% increase on standard stamp duty now applies across all levels, so now 3% is chargeable on the first £125,000, 5% on £125,001 up to £250,000 and 8% on the amount above £250,001. Depending on other income streams an investor may have, any profits made on renting out property will be taxed at the appropriate rate. If the property is sold, the profit would be subject to capital gains tax.

Can I use my pension to invest in property?

In a word, yes. But there are still tax implications to bear in mind. Changes to pensions rules in 2015 mean that now over-55s have full access to their private pension pot. While these changes were designed to give retirees greater freedom and choice in how they want to fund their retirement (previously the only option was to purchase an annuity with their pension) it is important to factor in any tax implications of taking cash out of your pension pot. For example, whilst it may be possible to take out the whole, or lump sums of your pension, past the 25% tax-free amount the sum will likely be taxable as income, which means a higher, or lower tax hold depending on the amount.

Despite the tax changes that have been introduced relating to both buy-to-let purchases and pensions, many investors are resolute about the myriad benefits that come with having a diversified portfolio of investments to fund their retirement. It is recommended to seek the help of a professional adviser when planning on investing in property for retirement, to ensure you are fully informed and can make the best plans for your individual circumstances.

All SevenCapital customers have access to a panel of recommended tax advisors who will help identify their best solution for investing in property.

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