02 November 2019

Savers should think twice before raiding their pension to purchase property

6 min read

Helen Morrissey, Personal Finance Specialist
Helen Morrissey

Corporate PR Specialist – Long Term Savings


Pension savers risk throwing away thousands of pounds of their hard earned savings if they raid their pension to purchase a second property according to Royal London.

Research undertaken by YouGov for the mutual insurer reveals one in seven (15%) people aged over 55 would consider investing in a buy-to-let property to fund their retirement. However, for those approaching the age at which they can access their pension (45-54) the figure almost doubles to 29%3.

Royal London analysis shows that not only would a saver have to pay income tax on any pension withdrawal; they would also incur costs such as stamp duty. These taxes can bite huge chunks out of the initial sum meaning people may need to radically rethink what type of property they can afford.

As an example 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. As they would be purchasing a second property they would also be liable for second home stamp duty which would take a further £12,400 from their pot. This would leave them with just £267,600 of their initial investment (see tables in notes to editors).

The situation would be even worse for someone in Scotland as the different regime means they would be left with just £261,400.

The situation gets worse the bigger the pension is. Someone in England with an £800,000 pot would be left with just £511,400 of their pension left while in Scotland they would be left with just over £489,000. This is before other costs associated with moving house such as solicitor’s fees are taken into account.

While seeking financial advice would ensure people were aware of these costs and their likely impact, just over a quarter (27%) of those who said they would use their pension to fund a buy to let property said they were unlikely to take financial advice.

Fiona Hanrahan, business development manager at Royal London, said:

“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.”

Notes to editors

  1. Tables showing stamp duty rates across the UK

Notes to editors cont.

2. These calculations take into account the following assumptions:

  • PCLS of 25% is taken
  • No other taxable income in the same year
  • SDLT,  LBTT and LTT is based on the fund less any income tax
  • The property is for buy to let purposes

No other costs of property purchase have been taken into account

3. The YouGov research used a UK Representative sample of 2,014 UK adults. This was made up of 387 in the 45-55 age group and 1,627 in the 55+ age group.  

For further information please contact:

Eliot Woolfe                 eliot.woolfe@royallondon.com

Press Officer                02032725332

About Royal London:

Royal London is the largest mutual life insurance, pensions and investment company in the UK, with assets under management of £139 billion, 8.6 million policies in force and 4,348 employees. Figures quoted are as at 30 June 2020.