How to put buy-to-let property in your pension

published 3 December 2014

The new pensions system that begins in April will be remarkably generous to retirees. They won't have to put up with rip-off annuity prices, they'll be able to withdraw money from their pension when they like, and they'll be able to pass down money inside a pension to their heirs tax-free.

But there is one thing they still won't be allowed to do: hold buy-to-let property inside their pension wrapper. Instead, if they want to buy property to provide them with an income on retirement, they will have to take the cash for the purchase out of their pension wrapper first.

Might this be a good idea? It's hard to see how. Only the first 25% of cash taken from a pension comes tax free. The rest will be taxed at your marginal income-tax rate.

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So if you have £500,000 in your pension you want to use to buy property, taking it all out at once would land you with a minimum income-tax bill of more than £154,877, according to numbers from Old Mutual. Take into account the fees you pay to buy a property and you're left with £342,123 to spend. Get a 7% yield on that and you'll make an income of £23,948.61.

That's nice. But you could have got the same return on your £500,000 pension with a yield of 4.8%, and you'd still have more capital too. What's more, while your pension can be passed down tax free, the buy-to-let can't: if your total assets on death come to more than the nil-rate band for inheritance tax, another 40% will go to the tax man.

The good news is that the UK financial industry, as ever, has a clever way to get around this. Property firm Mill Group is launching a residential-property real-estate investment trust (Reit) that will build a long-term portfolio of buy-to-let properties (the seed portfolio will be based in Bristol, Guildford and London).

Investors won't need to hold their own properties to participate in Britain's buy-to-let obsession: they'll only have to hold shares in the Reit, which can be done in a self-invested personal pension (Sipp).

Sadly, this Reit doesn't come cheap. The managers will take 9% of rents, there will also be a management fee of just under 1% (this seems like double-dipping to me), and there will be a performance fee added on top.

Given that I know many MoneyWeek readers like buy-to-let, I can see the attractions here. But there's scope for competition in this area and I'd be tempted to see if a competitor might not at least get rid of the performance fee before I considered investing.

If you feel differently, the Reit is scheduled to list in December 2014. You can get into the fund pre-launch with a minimum investment of £1,000 via syndicateroom.com/reit.

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.