Pensions vs buy-to-let: Inheritance tax matters

Row of houses with for sale and to let signs. Pensions vs buy to let.


Julie Hutchison

22nd November 2015 at 9:00am

I’m always slightly surprised when someone says “buy-to-let is my pension”. It usually comes up in the context of them buying property now, to rent out and continue renting out in retirement.

But does buying a property really stack up when you compare it to a pension?

Property vs pension: The case for flexibility

A major limitation as I see it is the lack of flexibility of income generated from property. In contrast, with a modern pension I can start, stop, increase and decrease how much money I take out after the age of 55. But I can’t do that with a fixed monthly rent. And getting that rent depends on the tenant paying me.

Property vs pension: Tax issues

That brings me on to tax and access.

A buy-to-let property is inside your estate for inheritance tax purposes, which could mean 40% tax is due when you die. Your modern flexible pension is not, and can even be passed on entirely free of tax, depending on your age when you die. If passing on wealth to your loved ones is important to you, this could make a huge difference.

And there is a timing issue about how quickly your loved ones could access your money after you’re gone. After all, they might need to. A property could take months to be sold, involving the usual wait for probate/confirmation to be granted. And that assumes a buyer can be found quickly, which could be over-optimistic. Your loved ones are likely to be able to benefit from your pension savings a lot quicker, assuming you’ve nominated who you want to benefit.

In a changing world, it makes sense to be able to respond to changing circumstances. Whether bricks and mortar or a pension delivers the flexibility and tax results you want needs careful consideration. I think I know which one I’ll be relying on.

A pension is an investment. Its value can go up and down and it may be worth less than you paid in. This information is based on our understanding of legislation and regulations in November 2015. Legislation and regulations can change.

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