Why Pension Release Is Perfect For Property Professionals’ Portfolios
If your borrowing facilities have been exhausted, this under-utilised strategy could get you going again.
Whether it’s residential property for homes, or commercial property for business use, property investment has always been a good long term bet.
Over time, as a result of limited building opportunities and strict ‘green belt’ policies in the UK, property values will always tend to rise. Historically, whilst values have fallen and risen in the short term as a direct response to economic conditions, over longer periods, values have usually kept pace with inflation, often exceeding it. And that’s exactly what you want from an investment.
But since the 2008 credit crunch, funding for property development and investment has become much more difficult to come by. Amounts being lent as a percentage of valuation are less generous than before, interest rates are higher and the cost of the associated fees have mushroomed. It’s a sorry state of affairs. But there is an upside.
With all that doom and gloom, property prices have fallen back in recent years, and that makes property investment potentially a more attractive proposition compared to the past. That is, if you can get hold of the money to extend your portfolio.
Chances are, right now, you have access to the capital you need.
You see, throughout your working life, you may have built up sizeable funds in pensions. Maybe you were a member of a company pension scheme at some point in your life. Money you and your employer saved is preserved for your future. You could have made contributions to an individual pension, either alongside your company scheme, or because you weren’t able to join a company scheme. And you may have contracted out of the State Pension Scheme, or SERPS as it was known.
Surprisingly, it could all add up to a tidy sum of money. And you could unlock some tax free cash to reinvest in property, through pension release.
Taking pension release earlier than your retirement isn’t selling out.
Quite simply, it doesn’t have to reduce the amount of money you’ll be able to draw when you finally decide to stop work. On the contrary!
As a property professional, you already know that property is a great long term investment. Your pension is just the same – a long term investment. Here’s the point.
It’s highly likely that part of your pension fund is already invested in property, as every fund manager knows it provides a good return over the years, through capital appreciation in the property value, and the rental income the property generates.
So what’s wrong with releasing part of your pension fund to invest in property that’s under your control?
Pension release can invigorate your property portfolio in two ways.
Once you’ve drawn tax free cash from your pension, you can extend your property portfolio in two ways.
1. Direct Investment
If you’ve released sufficient money from your pension, you could simply buy property outright, without the need for any further borrowing.
2. Leverage Your Pension Release
The money you release from your pension arrives without you having to make any monthly repayments on it. All you’re doing is encashing up to 25% of the value of your pension fund. And because it’s unburdened with interest payments, you can use it as a deposit on one or more properties. You can top up the purchase price with relevant bank loans or mortgages, using your pension release to remain within the loan-to-value limits set by your lenders. Either on a general facility across your portfolio, or on an individual ‘buy to let’ basis.
You don’t have to lose out in retirement.
On the face of it, taking pension release early would seem to limit your retirement benefits. But not in this case, providing you follow this.
In terms of the money you unlock, you’ve simply moved it from the control of your pension fund manager, to your control. Assuming you’ve bought well, the capital value should increase. It could actually do better than the capital growth you’d earn within your pension fund, when you take into account the fact you’ll no longer be paying pension fund charges to your provider.
When it comes to the rental income, to ensure your retirement income doesn’t suffer, you should make a regular payment to top up your pension. After all, had you left your money invested, the rental income generated would have been reinvested, so you should do the same.
When you consider the average pension fund has only grown at 3% to 5% in recent years, you won’t have to do that much to get a better return.
Clever property purchase may improve your pension prospects, because you’re in control of your money.
But don’t rush in to grab hold of your cash. It’s possible that some of your pensions might include such generous guarantees or other benefits, it would be a bad move to forego them in the pursuit of as much tax free cash as possible through pension release.
The solution is obvious. You need to have all your pension funds assessed in detail by an independent pension specialist, to see whether it’s a good idea to release some tax free cash from your pension, which you could use for property purchase.
Complete the form above to see how much tax free cash you could get using pension release.
If you’re an adviser to property developers or property investors, you could do more business by helping your clients release cash from their pensions »