Can a buy-to-let property provide a retirement income

Can a buy-to-let property provide a retirement income

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Nick Reeves
Published: 21 Jan 2015 Updated: 13 Jun 2022

This new freedom opens up several opportunities for pensioners to seek alternative sources of retirement income – one of which is the purchase of a buy-to-let property. In this article we look at whether such an investment could give you a sustainable income throughout your retirement.

How much tax is there to pay?

While the prospect of regular rental income may sound appealing at first, the purchase of a buy-to-let property could prove to be highly tax-inefficient and not necessarily the best use of your pension savings. In the below example, we look at how a £400,000 pension pot can be eroded by the purchase of a buy-to-let property.

The £400,000 pension pot would be withdrawn in two parts:

  • 25% tax-free lump sum - £100,000
  • Taxable withdrawal - £300,000

The Income Tax liability on the taxable withdrawal of £300,000 would be approximately £120,000 (based on 2015/16 tax rates, and assuming no other sources of income). This means that the £400,000 pension is immediately reduced to £280,000 as a result of the full withdrawal.

On top of this, there is stamp duty to pay on the purchase of any property worth over £125,000. This would reduce the value of the pension by £3,750 when buying a £275,000 property. This reduces the overall value of the pension to approximately £275,000, before additional expenses such as solicitor fees and furnishing the property. And if you eventually sell the property, you may also have to pay Capital Gains Tax if you make a profit.

Drawing an income from your buy-to-let property

Rental yield can vary widely depending on the location of the property. The typical yield varies between 4 - 7%, before the associated costs for insurance, agency fees, maintenance of the property and so on. This would give investors a potential annual income of £11,000-19,350 on the purchase of a £275,000 property, although the income would also be subject to Income Tax.

This would mean a potential income yield of just 2.75 - 4.81% on your initial £400,000 investment, which is broadly similar to current annuity rates. However, unlike properties, annuities provide an income with no investment risk and do not come with ongoing maintenance costs – and they do have other advantages and disadvantages to consider.

It is also worth noting that the purchase of a buy-to-let property is a highly concentrated investment into a single asset, and as such you could be exposed to additional risks. For example, there could be periods where the property is empty and no income is provided, or the value of the property could fall with fluctuations in the housing market – both of which could significantly reduce your income in retirement.

All things considered, at Tilney Bestinvest we would not typically recommend cashing in your pension to purchase a buy-to-let property as a source of retirement income. If you would like to discuss your own options for income at retirement, or for more information on how this year's pension changes could affect you, why not get in touch with one of our qualified financial planners today? Simply email us or call 020 7189 2400.


This article was previously published on Tilney prior to the launch of Evelyn Partners.