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Pension decisions: taking the whole picture into account

Radio 4’s Today programme this morning included an interview with someone who is planning to use the soon to be introduced Pension freedom rules to withdraw a large sum of money from his pension to invest in a buy-to-let property. The person interviewed emphasised that he had taken a great deal of advice before making this decision, which seems to have been largely driven by the higher anticipated returns on a buy-to-let property than other traditional pension income providers such as annuities. To facilitate the investment the pension holder was withdrawing capital from the pension scheme.

From a private capital point of view pension funds have two advantages: any remaining funds in them are not normally subject to Inheritance tax on the pension holder’s death (and the income tax position is due to be significantly improved from 6 April 2015); and, whilst the pension income will be taken into account when assessing someone’s ability to pay care fees, the capital value of the pension will not.

If you are likely to have an Inheritance liability on your estate (which will be the case if your assets exceed £325,000 in value for an individual or £650,000 for a couple) then taking assets out of a pension to invest in a buy-to-let property, or indeed other assets, will put additional capital into your estate for Inheritance tax purposes. In addition, if you enter care at a later date, then not only the rental income but the value of the property will be taken into account in the assessment of your ability to pay towards that care. A buy-to-let property will also be fully liable to Inheritance tax; business relief exists for business assets but a buy-to-let property, or even a portfolio of them, is regarded as investment property and not liable for Business relief.

Not only the income tax position, but also the Inheritance tax situation and care fees planning, should be taken into account when making these vital decisions on retirement.