Will new-found pensions freedoms lead to floods of money pouring into buy to let? This was the suggestion of many commentators, including those both supportive and critical of the Government’s measures.
But one pensions rule that is not changing – and of which many investors are unaware – is that residential property cannot be held within a pension. This is unlike all the other investment options outlined in the main article, left. Those other investments, such as bonds, shares and funds, can be left within the saver’s pension wrapper and so enjoy continued growth free of capital gains tax, even if their owner is drawing regular income or lump sums (both of which would be subject to tax) throughout their retirement.
But if the saver wanted to buy property to let, his or her money would first have to be removed from the pension. Then the purchasing process would proceed as with any other buy-to-let investment. A mortgage would be raised, a property bought, let and managed.
Proponents of buy to let, such as Stuart Law of Assetz, a property investment club that recommends certain properties and coaches would-be landlords, was among those predicting a “boom”. He said: “The radical pensions reforms are likely to trigger a huge surge in buy-to-let investment as the over-55s look to make use of their pension pots to get maximum returns. Property investment is still streets ahead compared to any other form of investment returns.”
The recent resurgence in house prices, in which average prices have risen by more than 7pc in the past 12 months, might further encourage people to invest. Longer-term house price growth is around 6pc per year, according to most reliable measures. This compares well with the returns on shares.
But many commentators doubt that any such “flood” into buy-to-let will occur – and go further, urging caution.
Joss Harwood of Eldon Financial said: “Buying to let is not hassle-free and it’s not risk-free. As you get older, you become more cautious. The big risk with buy-to-let is that the property stands empty. If you have a period of costs mounting and no income, that can be disastrous.”
Unless retired people have a great deal of pension money to redeploy into their property investment, there will need to be a mortgage, adding to the risk.
Brian Dennehy of FundExpert said: “We are talking here about people in their 60s or older. At the moment if you are borrowing to buy a property in London or the South, your yield – the return you get from rent – is very low indeed, especially after the costs of a mortgage are taken into account. Arguably this is the very worst time to go into buy-to-let, just when prices are high, yields are low and the interest rate charged on mortgages is bound to go up.” He said investors counting only on rising property values, rather than the income generated through rent, were taking a “significant risk”.
Mr Law agreed in part, saying: “Potential investors would be wise to look not just to the South East, where purchase prices are exceptionally high. Northern city centres such as Manchester, Leeds, Lancaster, Birmingham, Liverpool and Sheffield are performing well.”