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Landlords And Pensions – What The New Rules Mean
1 September 2014
Landlords often talk about property pensions – but how much can they save each year into a private pension plan?
The answer depends on what type of property business a landlord runs.
Those that miss out on basing pension contributions on rental income are buy to let and house in multiple occupation (HMO) investors as rental income is not considered ‘relevant earnings’ for pension saving.
Property company landlords who take their remuneration as dividends also fail the relevant earnings test.
Both incomes are considered earnings from investments and are not allowed in the formula for working out maximum pension contributions.
So what can full-time property investors pay into a pension?
Everyone has a £3,600 a year limit regardless of their source of income that they can contribute into a pension.
For basic rate taxpayers, that is topped up by 20% to £4,500 with pension contribution tax relief.
With average 5% fund growth compounded over 15 years, that £3,600 a year is worth a pension fund of around £66,000.
Under the new easy-access rules coming in from April 6, 2015, £16,500 can be taken tax free and the rest drawn down subject to tax to spend as a landlord wishes.
The real winners are furnished holiday let investors as profits from managing these rentals are considered relevant earnings for a pension, so they can contribute up to the level of their annual earnings, subject to the annual contribution cap of £40,000 a year.
Private pension contributions are not the only savings snag for landlords.
From April 6, 2016, the new flat rate state pension scheme starts.
The expected weekly payment for a single pensioner is expected to settle around £155 a week or £8,104 a year.
But hidden in the small print is a qualification rule that means landlords could lose out on the full payment if they have not accrued 35 years of paying the right levels on national insurance contributions.
The current state pension requires 30 years to qualify for the full payment.
Many landlords may consider profits generated by their property portfolios as their pensions, but that could mean carrying on working or reduced profits from hiring a manager.
With a flood of changes on the way, now could be a good time for landlords to review their pension plans.