April 2015 will see changes to pension legislation come into effect allowing lump sums to be transferred into bank accounts for any purpose.
Investment in income-generating property assets are expected to rise as eligible pension-holders seek better rates of return than those achievable via pension funds or annuities.
However, many pension-holders are unaware of the tax implications of withdrawing lump sums representing more than 25% of their pension pots. Director of John Charles Property Investments , Gareth Bertrum said:
"For those people that have saved into a pension scheme and reached age 55 as of April 2015, there will be the option to transfer the whole of the pension fund directly into your personal bank account. The sting in the tail is that tax will be due on part of the pension if you choose to transfer out."
Tax liability is the sting in the tale
The law currently allows pension-holders to transfer 25% of their pension funds without any tax obligation and this is set to remain. However, the remaining 75% of a pension pot will be taxable if withdrawn as a lump sum.
Bertram continued: "Essentially, any transfer of the 75% element to your personal bank account will be taxed at your marginal rate. If you pay 20% tax as most people do, then 20% of what you transfer out will be due to HMRC. This also means it is possible to slip into a higher rate of tax very easily by transferring too much out".
"What isn't always immediately obvious to people is that by being patient and transferring the money into their personal bank account over a number of years could significantly reduce their tax liability."
Property investment consistently out-performs annuities
In spite of the downside, the changes will allow millions of savers access to money that was previously locked away and the considerable returns available in the property market will prove too much of an opportunity to miss out on.
Industry experts believe that it won't just be the UK that benefits from a surge in property investment, as pensioners look further afield for value in up and coming overseas markets.
Investment in income-generating property assets such as student accommodation, hotel rooms and buy-to-let have become more accessible in recent years meaning that entry levels are now much lower.
"Interest in property here in the UK and abroad is going to rise sharply in March and April as the dream of buying overseas becomes even closer. Thanks to these changes, people will now have either a substantial deposit or possibly the opportunity to buy outright," said Mr Bertram.
"The average pension fund in the UK is approaching £70,000, so someone earning £25,000 would be able to take roughly £50,000 after taxes. This will limit the locations in which they can buy property but they're locations that didn't exist before these changes."
The rise and rise of income-generating property assets
"We have an obsession with property here in the UK. So many people have generated their own success stories from investing in property that you can only foresee a surge in buy-to-let investment. For some very clever investors choosing to transfer out in one swoop, they may even overcome the tax charges easily through better use of their money than if it remains in the pension fund. With the average property purchase taking around 10-12 weeks we could even see interest spark up right from the beginning of 2015," he added.
Income-generating property assets are among the best performing year-on-year and have the added benefit of being a tangible asset with intrinsic value. Investment returns are achieved from capital growth of the property itself and an income is generated from rental.
Hotel rooms and student accommodation have become extremely popular investment vehicles for those looking to enter the property market. Generally purpose-built and professionally managed, dwellings are sold as units with a comparatively low price tag for residential property.
2014 saw the rise of the buy-to-let investor across Europe and the UK. 2015 is set to consolidate growth in this market as entry becomes more accessible to a higher number of smaller investors.
- Friday 09 January 2015