How to Invest in Property Through Your Pension Fund

If you’re currently sitting on a pension pot and wondering if there’s a smarter, more efficient way to make it work harder for your future, then you may wish to consider a property investment.

Using your pension to invest in a property – particularly Houses in Multiple Occupation (HMOs) – could be a financial venture worth considering. Whether as a solo or joint property investment, using your pension as a backbone could earn you incredible long-term rewards.

Such a move has gained popularity for several understandable reasons, but there are important considerations to bear in mind before committing. Let’s explore how you can turn your pension into a lucrative property investment opportunity, particularly focusing on HMOs.

Understanding Pension-Based Property Investment

Before diving into the specifics of an HMO investment using a pension, it’s important to understand the basics of what’s involved.

In the UK, certain pension schemes allow you to directly invest in property, offering a unique opportunity to diversify your retirement and property portfolios simultaneously.

The two main vehicles for this type of investment are:

-Self-Invested Personal Pensions (SIPPs)
-Small Self-Administered Schemes (SSAS)

These two schemes offer a bit more flexibility than traditional pensions, allowing you to take more control over your investment decisions. With these in tow, you can potentially achieve better, long-term returns through strategic property investment.

As far as maximising your pensions go, it’s always prudent to take professional, impartial and independent advice from a pensions provider and financial advisor. This way, you can ensure the pot(s) you have cultivated can yield you the best possible return through property ownership.

Why Consider HMOs for Your Pension Investment?

While many people approaching retirement may consider using their pension to buy a new home for themselves, HMOs represent a particularly interesting opportunity for pension-based property investment. 

For starters, HMOs typically generate stronger returns compared to standard buy-to-let properties, with figures suggesting an average 4% increase in rental yields than standard tenancies. With an HMO you can generate more income because you have multiple tenants who pay rent separately, and the more bedrooms and tenants you have, the more rental income you can generate.

While HMO tenants usually come and go more frequently than buy-to-let tenants, turnover is usually high enough so rental void periods are exponentially reduced. There is an increased demand for affordable, flexible housing arrangements, and HMOs offer a flexible alternative. With higher house prices and rent costs, HMO properties appeal to a wider audience, particularly students and young working professionals. Additionally, with rental yields also being high, and with sales activity at its highest since 2020, this suggests a lucrative opportunity is afoot for ambitious investors. 

Therefore, if you’re concerned about generating monthly income on HMO properties, there is enough reason to believe this will be more easily achieved than with a standard buy-to-let home. Of course, it helps if you can work with specialists who can handle the day-to-day complexities of HMO management, like HMO Architect.

Key Steps to Invest Your Pension in HMOs

To invest in property through pension funds, the pension fund must qualify. It must either:
-Be funded entirely (directly or indirectly) by pension members
-Bear the investment risk
-Comprise pooled contributions from multiple pension members
-Assume risk by pension members across various investments
-Be established in the UK or a member state of the EU

Getting started with pension-based HMO investment requires a few key preparation steps.

1. Check Your Pension Eligibility
-Ensure your pension scheme is eligible for property investment
-Confirm you have sufficient funds (most lenders require a minimum pension pot)
-Understand any age restrictions (typically available before 55 under certain conditions)

2. Choose the Right Pension Structure
–SIPP: Ideal for individual investors
–SSAS: Better suited for business owners and directors
-Confirm you have sufficient funds (most lenders require a minimum pension pot)
-If not ideal, consider transferring funds into approved schemes like ARFs (Approved Retirement Funds) or PRBs (Personal Retirement Bonds)
-Consider setting up a new pension arrangement if your current one doesn’t support property investment

3. Consider the Funding Options
-100% pension funding
-Pension plus borrowing (usually  up to 50% of your pension value)
-Group investment with other pension holders

Important Considerations for HMO Pension Investment

Before proceeding, consider these crucial factors
-Location considerations for HMO properties
-HMO licensing restrictions and requirements in your target area(s)
-Planning permission for property conversions
-Building regulations compliance
-Ongoing and long-term management costs
-Tax efficiency benefits and tax-deductible expenses
-Property suitability and state of repair
-Future long-term market growth potential
-Rental yields and tenant turnover
-‘Opt to Tax’ implications from vendors

It’s also important to remember that you are not permitted to use your pension fund to buy a property with the intention of short-term resale. Property investments should always be made with long-term interests firmly at the heart, as opposed to short-term wins.

Managing Your Pension-Held HMO

If you have been granted permission and approval for an HMO property investment through your pension(s) it’s important to not let certain factors go unnoticed or amiss.

To help with everyday expense management and financial decisions, it’s always prudent to invest in professional property management software. This will also help investors understand their cash position and make informed decisions regarding property maintenance, upgrades, and restoration if need be. It will also help investors comply with HMO housing regulations and ensure that all utilities and facilities are adhering to industry standards.

Working with a reputable HMO property management provider will also help in the tenant selection and management stages, ensuring that turnover is minimised and vacancy periods are also reduced.

Taking the Next Step in Property Investment

If you’re considering how you can transform your pension into a profitable and sustainable HMO investment, then look no further than HMO Architect for advice. Our team of experts are here to guide you through every step of the HMO management journey, from initial planning to successful day-to-day management. 

Book a property strategy call with our specialists or get in touch for a personalised quote to discuss your specific situation and find out how your pension fund can become more profitable.

Key Takeaways for Pension Property Investment

Before proceeding, consider these crucial factors
-Property investments through pensions can make a tax-efficient way to build and bolster your retirement and property portfolios
-HMOs offer potentially better yields and benefits compared to traditional buy-to-let investments
-Careful planning and decision-making is the most important step to take in any decision regarding pensions and property
-Consulting with professionals for guidance and advice is essential for regulatory compliance and maximising your investment potential

While investing your pension in HMO property can be highly rewarding, it’s important to seek professional HMO and pension advice from accredited experts to ensure it aligns with your long-term financial goals and retirement plans.

Disclaimer

The information provided on this blog is for general informational purposes only and should not be considered legal, tax, financial or investment advice. While we make every effort to provide accurate and up-to-date information, we cannot guarantee the accuracy or completeness of the content.