Using my pension to buy to let

papisco

I have got a very unusual request which I am not even sure is feasible. I'm 38 years old and as time goes on I'm becoming very pessimistic about stock markets in general. As a result, I am thinking of asking Aegon who manages my pension to use some of my pension pot to buy to let.
As it happens I'min the process of selling my flat which is in a very good location . the property would yield rental income of around 8%, not to mention capital gains. My property is 20 minutes from central London and there should be any problems with occupancy.

I would like to ask aegon to buy the property as part of my pension portfolio and possibly rent it out to me or even another tenant. I think this would guarantee a strategy stream of revenue flow to my pension while at the same shielding me from stock market volatility.

I appreciate that this might be extremely unusual request, but I would love to Hera's your thoughts. Thank you very much.

mania112

Not an unusual question.

However, it's not possible. Residential property cannot be owned within a pension.

Commercial property is possible within a pension (a Self-Invested Personal Pension), but not anything residential.

The closest thing to a property you can actually live in is a Pub/Hotel which is allowed an allocated living quarters - but even then you'd have to be the manager too...

EDIT: But another way to look at it is to buy a property (in the normal way) and rent out a room, putting that income into your pension.

jamesd

Residential property is a prohibited investment for personal pensions. Business property is acceptable, but BTL counts as residential for this purpose. Some larger schemes like some major student housing projects can be eligible even though they are residential in broad nature.

You will find that you are barred from living in any BTL property of your own by the mortgage terms.

You should not be pessimistic about stock markets in general unless your intent is to retire within five to ten years and even that's pushing it a bit if we include all markets globally rather than just the US large cap market.

Why sell the flat if it's such a desirable property? Surely you could remortgage it to a self-financing BTL and that would typically remove it from the affordability tests of major residential lenders, allowing you to proceed with a standard mortgage on a new home. If you did this you would need a valuation of the flat at the time you transferred it into your property letting business because that value is the cap on the amount on which you can receive an income tax deduction for mortgage interest. You'd also need the value for calculation of personal residence and letting relief on some future sale. It's entirely possible that those reliefs could eliminate your eventual CGT liability.

It's quite common for BTL lenders to require you to own a property of your own so you might need to ensure that both transactions complete on the same day to meet the lending criteria. I don't know whether all lenders require this, nor whether any that don't offer decent costs.

thenudeone

mania112 wrote: »

Not an unusual question.

However, it's not possible. Residential property cannot be owned within a pension.

Yes it can.

However, there are very strict limitations.

IIRC, there must be a genuinely diverse property portfolio valued at £1m or more, with a limit of 10% ownership of any one property.

Each SIPP provider will make their own decisions about what they allow within their SIPPS. here's one example: http://www.mwpensions.co.uk/handouts/residential%20property.pdf

So putting a single residential property into your own pension is impossible.

mania112

thenudeone wrote: »

Yes it can.

However, there are very strict limitations.

IIRC, there must be a genuinely diverse property portfolio valued at £1m or more, with a limit of 10% ownership of any one property.

Each SIPP provider will make their own decisions about what they allow within their SIPPS. here's one example: http://www.mwpensions.co.uk/handouts/residential%20property.pdf

So putting a single residential property into your own pension is impossible.

It's semantics really. For the purposes the OP is suggesting the answer is no. I suppose I should have said personal use rather than residential.

But residential isn't exactly wrong either.

From your link:

"This means that a SIPP or SSAS cannot directly
wholly own a residential property. It must be a part
owner (not more than 10%) and there must be no right
for any personal use."

Technically, yes, but less then 10% (and alongside other property) and you must not live in it.

It's easier to remove the jargon and just say no.

atush

I'm 38 years old and as time goes on I'm becoming very pessimistic about stock markets in general. As a result, I am thinking of asking Aegon who manages my pension to use some of my pension pot to buy to let.

This does not make a lot of sense to me. The markets have been good recently. Yes, there wa sa recession and major market downturns int he last 10 yrs, but alos huge market gains.

I am up over the last ten years, and majorly up over the last 15. In your 38 years when did you actually look at the markets objectively or did you just look at scary headlines?

papisco

Thanks for your response. I understand that the markets have rallied over the past couple of years but I think the fundamentals are still questionable. I do think that they'll be another meltdown and I merely trying to diversify my investment and not have to rely on the stock market.
It's a tricky one. Sorry for the language but I do feel like a during duck waiting for !!!! to blow up.

papisco

Ideally I would like to keep it , but I think I need to release the capital to finance my nextmove. I'm still struggling to uunderstand rules governing but to let. I just don't have enough information on how buy to let market generally works.
I must say that I thought about it but was put off by the amount of deposit required. I believe about 40%.
Please correct me if I'm wrong.

Yorkie1

Usually more like 25% deposit, and a rental yield of 125% the mortgage interest at about 6%.

Annisele

papisco wrote: »

I merely trying to diversify my investment and not have to rely on the stock market.

For most people, direct investment in buy-to-let properties is very bad from a diversification perspective.

Forgetting about pensions, tax wrappers and gearing for the moment, let's say you've got a total of £100k in assets. If you want to directly invest in a BTL, you're going to have to put down a deposit of at least £25k. So that's 25% of your portfolio in one single illiquid asset. If the major employer in the area / university / train station etc closes, or if renting becomes less attractive as house prices fall, or if you get tenants from hell, or if some other risk kicks you, you're stuffed.

If you have £1million in assets, then that same £25 is only 2.5% of your portfolio - and 2.5% of your assets in a single illiquid asset isn't quite so scary. I'm not saying don't invest in property, I'm just saying that if diversification is your concern you might want to consider other places before a direct BTL investment.

jamesd

papisco wrote: »

I must say that I thought about it but was put off by the amount of deposit required. I believe about 40%.

The highest LTV BTL product on the market at the moment is for 80% LTV, from one provider. There are many at 75%.