Warning of 33% tax trap in using pensions for Buy-To-Let

The following is an article from yesterday’s FT, in which journalist, Amy Austin, highlights the potential pitfalls in taking one’s pension as a lump sum in order to invest in property. It really just highlights the importance of taking regulated advice when making such a big decision.  

‘Savers are at risk of losing a large proportion of their retirement income on tax if they raid their pension to purchase a second property, Royal London has warned.

Research undertaken by YouGov for Royal London, published last week (November 2), found out of 2014 individuals polled, 15 per cent of those aged over 55 would consider investing in a buy-to-let property to fund their retirement. 

This almost doubled to 29 per cent for those aged 45-54 and approaching the age at which they can access their pension.

But Royal London warned by doing this the saver could incur a significant tax bill as by buying property, not only would they have to pay income tax on any pension withdrawals, they would also incur costs such as stamp duty. 

For example, someone living in England with a £400,000 pension would have to pay £120,000 in income tax if they accessed their pension as a lump sum. 

As they would be purchasing a second property, they would also be liable for second home stamp duty which would take a further £12,400 from their pot. This would leave them with just £267,600 of their initial investment, or 66 per cent.

Tax implications in England and Northern Ireland:

Pension fund value

Income tax

Stamp Duty Land Tax

Remaining fund

















Source: Royal London

Scottish savers would be even worse off and would be left with just £261,400 as they are subject to a different tax regime.

These calculations were based on an individual who takes their 25 per cent tax free lump sum and has no other taxable income in the same year.

The second property was assumed to be for buy to let purposes and property tax is based on the fund after income tax has been taken.

Although an adviser could make individuals aware of these costs, a quarter of those who would use their pension to fund a buy to let property said they were unlikely to take financial advice.

Fiona Hanrahan, business development manager at Royal London, said: “The flexibilities brought in with freedom and choice prompted many retirees to consider taking their pension as a lump sum to purchase a buy to let property.

"However, by doing this they risk being clobbered with tax to the extent that they are unlikely to be able to afford the property they were hoping to buy and would need to look at something smaller. 

“There is little understanding of how pension lump sums are taxed and people could find out too late and lose many thousands of pounds.

"We would urge anyone thinking of going down this route to speak to a financial adviser to go through their options.”

Rick Chan, director and chartered financial planner at IFS Wealth & Pensions, agreed that for most savers buying a second property using their pension funds was not worthwhile because of the tax implications.

Mr Chan said: "Firstly, over the years the government has increased taxation of buy-to-let investments, eg, 3 per cent stamp duty surcharge (higher acquisition cost), reduction in mortgage interest rate relief (makes rental income less attractive), changes in principal private residence relief & lettings relief (potentially higher capital gains tax on a future sale).

"Also, buy-to-let investments are subject to inheritance tax on death, so this could be up to 40 per cent of the value."

Mr Chan also said there were other concerns with property such as the fact it was considered an illiquid asset.

He added: "Property is an 'illiquid' investment so capital is tied up, there could be vacant periods when the property is not let out or in the unfortunate event that of bad tenants, it takes a couple of a months to evict them.

"Choosing to become a landlord isn’t a decision to be taken lightly and my view is that most retail clients should not be relying on buy to let investments as a sole source of retirement income, as similar or better returns could be achieved with pensions or Isas without the hassle, tax implications or practical issues."


If you have any concerns or questions about any finance related matter, please do not hesitate to call me at any time.

With best wishes,

Yours sincerely


Graham Ponting CFP Chartered MCSI

Managing Partner