Retirement News : Seniors : A home from home for your retirement plan

A home from home for your retirement plan

Date Added: 18-04-2005

A home from home for your retirement plan
By Helen Monks
 
 
 
BRITONS are obsessed by property, but considerably less enthralled by pensions. From next April — in a move designed to widen interest in retirement saving — savers will be given the chance to buy residential property within the tax shelter of a pension.
As part of its pensions tax regime overhaul, the Government will allow pension savers to have holdings in residential properties, such as holiday homes, buy-to-let properties and even private homes.

 
 
The change means that it will be possible to buy bricks and mortar with significant income tax relief. For example, higher-rate taxpayers will have the chance to buy a £100,000 buy-to-let property with just £60,000. In addition, rental income from the property and capital gains are also tax-free.

A further advantage might be that, under new types of arrangements introduced next year, properties held within certain pensions could be passed down the generations, although it must be emphasised that the current position on how this will be affected by inheritance tax is unclear.

Hargreaves Lansdown, the independent financial advisers, says that if you have insufficient money in your pension, your pension can take out a mortgage. The maximum mortgage is 50 per cent of the value of the pension, so if your pension fund is worth £300,000, you can borrow up to £150,000.

Initial interest in the new investment flexibility of pensions has been strong. Mike Morrison, a pensions strategy manager at Winterthur Life, the pensions provider, says there is evidence that individuals across the country are increasing their pensions contributions this year in preparation for a pension fund property next year.

However, Alasdair Buchanan, of Scottish Life, the insurer, cautions that the rule change should not be seen as an open invitation because buying property with your pension is not a mass-market option. He says: “The headline advantages look great, but this is not an exercise for the uneducated or unwary.”

Tom McPhail, pensions research manager at Hargreaves Lansdown, says: “If suitable tenants can’t be found and you have used a mortgage to buy the property, the mortgage interest payments still have to be made. This means mortgage arrears could lead to your property and your pension being at risk. If you are unable to sell the property, this may delay your retirement.”

If you do want to hold a property in your pension, you will need to pay for specialist legal, tax and financial advice, in addition to the usual costs of buying a house, because there are a range of potential pitfalls in the plan. Mr Morrison says: “If you buy a holiday property overseas through your pension fund, which your family stays in, you will either have to pay market rent or a tax charge reflecting that it is a benefit in kind.”

Mr McPhail also warns individuals against switching their primary residence into a pension plan next year. “We don’t expect many people to buy their family home within their pension,” he says, “particularly as private residences are already exempt from capital gains tax. In many cases, you would have to sell the home to convert your pension fund into a retirement income.”

While these products will appeal to some people, no one should lose sight of their investment objectives, Mr Morrison says. “It is not the panacea people might initially think. Pension investment decisions should be made on the basis of how effective they are in providing an income.”

 For More Information: http://business.timesonline.co.uk/article/0,,8214-1569182,00.html