Has George Osbourne launched Pension billions into the PRS?

by Readers Question

10:13 AM, 20th March 2014
About 6 years ago

Has George Osbourne launched Pension billions into the PRS?

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Has George Osbourne launched Pension billions into the PRS?

I hear that the Chancellor has changed rules on pensions today. From April 2015 the over-55s will be able to do what they like with their funds. With the demise of Annuities surely there will be a rush into property. What will be the impact?

Here are 2 quotes from the BBC web coverage:

“A massive reform of pensions has been announced by the government which will change the way many people fund their retirement.”

“The government is consulting on the rules which will apply from 6 April, 2015, but it is expected that you will be able to take your entire DC pension savings as a lump sum and spend or invest it as you like, as long as you are over 55. “

I don’t know much about Annuities but it seems that rates can be less than 3% if you choose to have your payments rise with inflation. Then the money is lost after you die. Not an attractive scheme. In contrast buying an unremarkable property to let should yield about 6% gross and say 4 to 5% net after costs and voids etc. Rents are vaguely inflation proof and the asset is retained by your estate.

I’m sure these numbers can be challenged and there will be regional variation on the property side. However, the picture would appear to show a large influx of new landlords.

Do you agree with this analysis? What impact will it have on the Private Rented Sector? Will the first time buyers get squeezed out even more?

Thanks

EdPension pot



Comments

Neil Patterson

10:16 AM, 20th March 2014
About 6 years ago

Calling all Property118 IFA members and sponsors:

Please could we have your input and thoughts on the new rules and if pension money could be advised to go into property or if it would be better spent in other more tax efficient routes.

Neil Patterson

10:22 AM, 20th March 2014
About 6 years ago

Reply to the comment left by "Neil Patterson" at "20/03/2014 - 10:16":

EG Use the tax free lump sum to pay off BTL mortgages after retirement ?

Gary Nock

10:33 AM, 20th March 2014
About 6 years ago

As soon as I heard this I said to my wife that some will take the money and put it into Property. Some will buy a flash car. Some will go on holiday. Some will do all three!!

But we should see some going into BTL. Annuity rates have been falling in line with the poor returns savers get on savings accounts now. So what could be the impact? Will it add to the "overheated" property market ( not convinced about this) or drive down rents as more properties will become available?

Ed Atkinson

10:34 AM, 20th March 2014
About 6 years ago

The Guardian has cottoned on to the issue:

http://www.theguardian.com/uk-news/2014/mar/19/chancellor-scrap-compulsory-annuities-pension-overhaul

I think it might be worse than the Guardian or this thread has identified. There will be a large cohort of say 55 to 60 year olds who are longing to get into Buy-to-Let and suddenly in April 2015 they could well be able cash out their pension and buy property, with nothing much preventing them from gearing up with mortgages. As far as we know they won’t need to retire to cash out their pensions. So effectively you can swap your pension pot over to property during the saving phase, not just at maturity.

So this could become a large sudden one-off injection of cash into the PRS. It will impact rents and house prices. I can see it becoming a large house price bubble with the inevitable crash quickly following.

Mark Alexander

10:42 AM, 20th March 2014
About 6 years ago

This could be the catalyst for the next property boom, we always knew there would be one, we just didn't know what it would be.

It's a good move to stimulate the economy too as the funds will be used proportionately, i.e. to purchase holidays, cars and other consumables too. Some people may even reduce their personal exposure to debt!

More signs of inflating away the debt crisis problem in my opinion and possibly great news for landlords.

I wonder if all those over 55's with big pension pots will help their children get into the property market? Maybe they will buy properties and rent them to their children? Now that would be novel, might the pensioners who have been so anti landlord actually become landlords themselves?

Some will, some wont, so what, who's next!
.

Andy Bell

11:15 AM, 20th March 2014
About 6 years ago

Reply to the comment left by "Mark Alexander" at "20/03/2014 - 10:42":

75% of the pot would be taxable! So maybe use the 25% then consider the increased draw-down facilities, with lowered pension income requirements to pay off debt over time.

One thing for certain, it'll inject taxable (direct and indirect) cash direct to the economy rather than to well sheltered annuity providers.

Lyndon Whitehouse

11:29 AM, 20th March 2014
About 6 years ago

If anyone is considering investing in property and aren't quite sure about the timing, IT'S NOW! The market is moving up and this will only fuel it!
Interested in owning houses in the Black Country? I can help. See my profile.

Adam Hosker

11:35 AM, 20th March 2014
About 6 years ago

In addition to the END of pension liberation companies, the P2P Companies are celebrating because ISA can be used to fund loans.

Its a big change, already talking about opportunities here related to both.

Barbara Thorning

11:40 AM, 20th March 2014
About 6 years ago

I believe some people will invest in the PRS sector, but there will be a bigger impact on the annuity industry. There would be more people willing to invest in property if the cash drawn out of a pension fund wasn't subject to a punitive 20% tax on 75% of it. This will put many people off drawing it out and in effect claws back the tax allowance offered on contributions in the first place.

I don't see the market being flooded with investors because most people are risk averse. Those who wanted to do this would have been putting their money into property already instead of making payments into a pension fund. No doubt there will be some who see it as an easy buck, but I don't see a huge increase.

Ian Ringrose

11:43 AM, 20th March 2014
About 6 years ago

I assume that this will only be open to people that already have a £12K per year secure pension income. (If so we are only looking at people with a pension pot over £100K or very old)

As tax will have to be paid on the money coming out, unless the person already has enough income to make them a 40% tax payer in all of their retirement, they will have to pay a lot more tax if they take too much money out at a time. So it is hard to buy a property without putting the money elsewhere for a few years as it builds up, or getting a mortgage.

If enough people make use of this, or the more flexible draw down rules, then annuity rates will improve for the people that don’t.

Personally if the rules are the same in 20 or 30 years time, I would be thinking of taking money out in years when I was not in 40% tax, (e.g. years when I don’t have any capital gains) and mostly using it to reduce mortgages. Assuming that the market for “old age” BTL mortgage has not improved by then.

I am assuming that there will be something to stop people moving to a tax haven for a few years, taking all the money out without paying any UK tax, them moving back to the UK to use the NHS. (E.g 5% tax on worldwide income in Cyprus, live in rented prop in Cyprus, keep most money in UK bank account.)

Lifetime mortgages, or reversion plans may be a nice way to increase the income that is produced assuming you don’t wish to leave the money to anyone. Having to keep lots of money as I MAY live for a very long time, so not being able to enjoy the years I do live for is a real issue.

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