Is buy to let as good as it sounds?

With the announcement that from April 2015 people will have full access to their pension at the age of 55, investing in buy-to-let became appealing to many. With historic low interest rates affecting the value of annuities, a rental income and hopes of capital gains can seem to be the better option.

At first glance, becoming a landlord can look like a lucrative proposition: property prices are rising, picking a prime location such as a student town should mean tenants are easy to find, and rent is collected each month. Before diving in, though, the outgoings need to be considered. We have an example below:

Mortgage: £75,000
Rental income: £700
Annual income before tax: £8400
Agency management fees: 15% (£1,260 a year)
One-month void period: £700
Average annual costs for arrears, maintenance and vacancies: £1,532
Mortgage repayment:    3.4% (£2,550 a year)
Total income after costs: £2,358

The annual income of £2,358 is before any applicable income tax and landlord insurance, and before possible issues like late payments or repairs. A further £700 will be lost for each month the property is without tenants. Insurance is essential, but a number of companies will not cover what they consider to be 'high risk tenants', which includes students, and often damage caused by a tenant is not covered, so could cost the landlord a lot of money.

In comparison, if a 65-year-old single male retired with a pension of £100,000, after removing £25,000 as tax-free cash he could receive the following incomes*:

Standard annuity: £3,603.84
Enhanced annuity: £4,133
Income drawdown: £6,637.50

Not only are these more than the rental income, but the annuities are guaranteed for life, whereas rental income is not.

There is the possibility of making a profit on the sale of a house, but there is no guarantee the value will increase; it could decrease and lose you money. There is particular risk if you have only one property instead of a portfolio.

There are various tax implications too, which would be dependent on your individual circumstances. There is the tax rate applied when the pension is withdrawn, the stamp duty applied on the purchase of a house, and you will be taxed on rental income. By comparison, money within a pension is outside a person's estate and exempt from tax, and from April can be passed on tax-free to beneficiaries. The flexi-access option for withdrawals means you will pay a marginal rate of tax, compared to the higher rate you could be charged for withdrawing the entire fund to buy a property, in addition to the tax on rent.

These figures show that investing in a property carries risks, and is not certain to yield good income or returns. For many people, the tax implications and volatile earnings will mean buy-to-let is not a sensible option compared to other retirement products.

Are you planning on withdrawing your entire pension to invest in property, or will the high tax rates discourage you? Tell us with a comment below.

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Important information


*Figures based on income drawdown at 150% GAD rate with the Gilt Index Yield figure of 3%; standard level annuity guaranteed for a 10-year period (fee based 1.25% from Aviva); enhanced level annuity guaranteed for a 10-year period (fee based 3% from LV). Comparison is based on a single male retiring at 65 in April 2014, taking 25% tax-free with a fund of £100,000.

The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section:

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