Savers urged not to raid pensions to purchase property

Pensions savers should think twice before they raid their pension savings to fund the purchase of a second property, Royal London has said.

It warned that savers risked “throwing away” thousands of pounds if they used their pensions to buy a second home.

Following a YouGov survey which found that 29 per cent of people aged 45-54 would consider investing in a buy-to-let property to fund their retirement, Royal London warned that income tax on withdrawals and stamp duty would leave savers worse off.

The taxes could take “huge chunks” out of the initial sum, meaning that people would need to “radically rethink” what type of property they can afford, according to the firm.

It highlighted an example of someone living in England with a £400,000 pension would have to pay £120,000 in income tax if they accessed their pension as a lump sum and £12,400 in stamp duty, which would leave £267,600 for the property.

The situation worsens the larger the pension, with a £800,000 pension pot leaving £511,400 for a property post-tax.

Additionally, YouGov’s survey also revealed that 27 per cent of those who said they would use their pension for property would be unlikely to take financial advice.

Royal London business development manager, Fiona Hanrahan, commented: “The flexibilities brought in with freedom and choice prompted many retirees to consider taking their pension as a lump sum to purchase a buy to let property.

“However, by doing this they risk being clobbered with tax to the extent that they are unlikely to be able to afford the property they were hoping to buy and would need to look at something smaller.

“There is little understanding of how pension lump sums are taxed, and people could find out too late and lose many thousands of pounds.

“We would urge anyone thinking of going down this route to speak to a financial adviser to go through their options.”

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