Pension Reforms - What do they mean to you?

Pension Reforms  - What do they mean to you?

This year new rules come into play that, for the first time, will allow those over 55 to access the cash in their pension pots. But what has this got to do with the housing market? Potentially, quite a lot. It means that people can now use their pensions to invest in the buy-to-let (BTL) market.

The numbers involved are significant, as the new rules will affect up to 400,000 people each year. So, on the back of these new rules, will so many new 'silver landlords' cause a spike in demand for property and an oversupply in the rental market?

A raft of recent surveys has demonstrated that there is plenty of appetite for investing in the BTL market. According to data gathered by the Bank of Ireland, 50% of British home-owners who aren't already landlords would like to become one. They also found that 41% of pensioners were planning on taking advantage of the rule changes to either pay off their mortgage or buy a new property. Another survey, this time from Direct Line for Business, discovered that 32% of 45-to-64 year-olds with a pension would consider becoming BTL landlords.

It's not difficult to see the attraction of investing in property when you consider the average pension produces an income of between 3% and 5% per annum, depending on a range of factors such as age and health. If you want to hedge against inflation with an index linked scheme, your return is likely to be closer to 3% than 5%. Buy-to-let, on the other hand, produces an average return of 4.2%, but can generate anything up to 11%. At the same time, rents tend to rise in line with inflation and property has the potential to produce significant capital growth. Another benefit of BTL is that properties can be bequeathed to the next generation, although this is a complex area for tax. As Daniel Baum of West End accountancy firm, Cameron, explains,

“If you don't want your beneficiaries to be stuck with a huge tax bill, it's an area where it really pays to think ahead and get it right.†He also points out that, “You will be paying HMRC at the front end too, as although the first 25% is tax free, after that, any money you take out of your pension fund will be taxed at the marginal rate.â€

Clearly, it's not all good news. And, although you will have better control over your investment with BTL, it will require far more of your time to administer than an old-fashioned pension scheme, even if the property is managed. Also, despite the fact that over the long term there is an undeniable track record of rising house prices, there can be short-term fluctuations, mortgage rates can bounce up and down and you would need to be able to withstand any void periods between tenants.

However, unlike personal mortgages, you can get access to BTL mortgages without worrying too much about your advancing age, although you will need a bigger deposit (around 40%) to get the best deals.

Regardless of whether it is the right investment for you, or not, the fact is that many pensioners will simply not have enough capital for it to be a viable option. According to the Land Registry the average price for a flat or maisonette in England and Wales is £170,822. A 40% deposit would equate to £68,329, almost double the size of the average pension pot, which is typically £36,800 at retirement age.

That is not to say the changes won't increase activity in the BTL market - they almost certainly will. There are plenty of people with larger-than-average pensions, but even those retirees with smaller pensions often have other types of savings they can draw on. Downsizing, a common activity around retirement age, can also free up additional investment capital. But even if people have got the available capital to invest, will they all do so immediately once the pension rules change? Unlikely. People tend to be far more cautious with their money as they approach their 60s and so they are unlikely to rush into any decisions.

Baum said, “I'm sure we will see an increase in BTL activity from April, but the scale of the changes will probably not be as dramatic as some have forecast. I think it's more likely just to produce a welcome boost for the market in the quiet period before the election.â€

if you are looking to invest in a BTL, please contact Naveed Salim  - Martin & Co Director, on 020 86754428 or email, to discuss the various options available.