Buying property with a pension: All you need to know

It is possible to buy property with your pension, but there are a number of factors to be aware of before you decide whether it’s right for you.

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Cathy Hudson

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Investing in property is considered to be a good bet by many, with property prices growing rapidly over the last 10 years. However, if you’re thinking about using your pension to purchase property, there are a few factors you should consider first. This also applies if you’re thinking about using your pension to buy a home for yourself or your children or grandchildren to live in.

There are two ways you can use your pension to buy property. One is to use the funds in your pension pot once you can access them (from the age of 55 onwards), and the other is to invest in property as part of your pension.

Using money from your pension pot to buy property

Since “pension freedoms” were introduced in 2015, you can now take as much money as you want from your pension pot from the age of 55 to do with as you wish (this applies to private pensions only, not the state pension or a final salary pension). This is instead of having to buy an annuity (a financial product that gives you an income for the rest of your life in retirement).

Although this gives you greater flexibility, it potentially exposes you to more risk. If you do plan on taking money from your pension to invest, it’s important that you think carefully about how you invest it, as this could end up reducing your retirement income rather than boosting it.

The first 25% of any lump sum you withdraw from your pension can be taken tax-free, but the rest will be added to your income for that year and will be taxed accordingly.

You pay 40% tax on any total income above £50,271 and 45% tax on anything above £150,000 in the 2021/2022 tax year. For this reason, taking out a large amount to put towards buying a property may not be worth it once you take the tax payments into account.

Investing in a buy-to-let

If you invest in a buy-to-let property with your pension money, there are also buying costs to consider, such as legal fees, stamp duty and mortgage costs (if you need one), and the ongoing costs of maintaining and insuring your property.

You’ll pay income tax on the rental income and capital gains tax if you sell it, and there is no guarantee that the value of the property will continue to go up – house price growth has been slowing since 2016. Plus, it would form part of your estate when you die, so would also be subject to inheritance tax.

Buying a property with your pension could put your retirement income at risk and you’ll be betting a large chunk of your pension fund on just one type of asset rather than spreading the risk across a diverse range. Property also takes time to sell if you need to release the cash quickly.

Buying a property as part of your pension

You can buy a property within your SIPP (self-invested personal pension), which a tax-efficient pension savings account that allows you to choose the assets you invest in, but only commercial property, such as office buildings or retail units. This means you can’t purchase a buy-to-let property within your SIPP. If you do buy residential property, you’ll pay a tax of up to 55% of its value.

If you own a business, there are significant benefits to buying your premises within your SIPP. Your business will then pay rent on it and you can make money from the rental income and the increase in the value of the property.

Other advantages of buying commercial property as part of your pension are that you won’t pay income tax on any rental or other income from it, you won’t pay capital gains tax if you sell it and it won’t form part of your estate for inheritance tax purposes. Any money you pay into your SIPP to buy the property will get the usual tax relief on pension contributions. You can even borrow money into your pension to help you buy it.

Investing in property indirectly

It’s a good idea to add property into the mix of assets you’re investing in to spread the risk, but you don’t have to actually buy the property outright. You can invest in property investment funds with your pension savings. This is where your money is pooled with funds from other investors and invested by a fund manager, either in physical property or shares in property companies such as developers.

Investing this way means you can invest smaller amounts rather than committing a large sum and you can invest in residential property funds as well as commercial ones. There is a range of different types of property funds to choose from including unit trusts and open-ended investment companies.

You can also buy shares in real estate investment trusts (REITs). These are companies that manage a portfolio of properties that generate income, which could be both residential and commercial. They have tax benefits so may be able to pay out more profits to investors.

As with any type of investment, you should consider getting financial advice before you go ahead.

Finder survey: Do you plan to purchase a property in the next 5 years

Response55+45-5435-4425-3416-24
No77.56%60.82%52.97%36.65%28.16%
Not sure13.85%22.22%20.34%18.01%17.48%
Yes8.59%16.96%26.69%45.34%54.37%
Source: Finder survey by Censuswide of 1032 Brits, December 2023
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