2015 pension changes fuel rise in buy to let interest
RECENT changes to pensions mean that anybody aged at least 55 with a defined contribution pension
RECENT changes to pensions mean that anybody aged at least 55 with a defined contribution pension - whereby you build up a pot of money that you use to provide an income in retirement - now has total freedom over how they take an income from their pension.
You can take the whole fund as cash in one go; take small lump sums as and when you like; or take regular income, drawing directly from the pension fund, which remains invested, or via an annuity where you receive a secure income for life.
The new regulations will allow you to take 25 per cent tax free cash from your pension, with any subsequent withdrawals taxed at the appropriate income tax bands.
The new rules are not available for people in final salary schemes.
With pensioners no longer being pressurised into investing in annuities, they will be looking for other higher-yielding investments. Many experts say this means a huge boost to buy-to-let investments.
At Savills in Bell Street, head of Henley lettings Richard Maby said: “From April this year, anyone retiring with a defined contribution pension will have complete choice over how they access it, subject to their marginal rate of income tax in that year, providing greater flexibility for many individuals.
“Some may be tempted to draw down their pension and invest in a lettings portfolio. Certainly, with the significant growth in demand already seen in the private rented sector predicted to continue and, with Savills research forecasting the value of sub-£1million property in this area likely to rise by up to 26.4 per cent by the end of 2019, property may continue to prove to be a very sound investment choice.
“Currently, demand is strongest for one- to three-bedroom properties with tenants favouring those in town centre locations, close to good transportation links and other amenities. [See Standard Property’s selection, currently for sale, on the front page].
“Not only do these properties appeal to a wide tenant base, attracting young professionals, small families and downsizers, but, on average, they provide a yield of about four per cent. Last year, the sub-£2,000 per month sector of the market accounted for 61 per cent of our business and demand continues to be strong with supply limited.
“No one, however, should underestimate the complexities of the lettings industry. Ever evolving in its regulation, it can be difficult to keep track of any changes. This is why we hosted our open morning at our Henley office earlier in the month.
“We had a lot of interest from those interested in building a portfolio or those with a current portfolio wanting to find out more about purchasing,Â financing, letting and managing property and the ways in which Savills can help.”
Using your pension to invest in property
The right property, in the right place, bought at the right price, can result in an excellent investment option, and according to research commissioned by Hargreaves Lansdown, 16 per cent of those planning to cash out their pension will invest their money in property.
Property investment is now becoming a far more mainstream investment vehicle, accessible to investors with the knowledge and foresight to spot effective investments. However, any type of investment carries its risks, so it’s vital you carry out thorough research and speak to property experts before you make your own decisions.
“Investing in property and becoming a buy-to-let landlord offers you two ways of earning money: via the monthly rental income and via capital growth,” comments Ricky Bhurji, investment portfolio manager at Romans, which has a branch in Henley.
“With a growing need for more properties across the UK, an ongoing lack of supply, and increasing demand due to low mortgage rates, I can’t see property prices stopping their upward climb anytime soon. This is great news for potential investors, and makes property investment one of the best ways of future-proofing your income.
“Strong rental yields and a strong tenant demand mean investors can enjoy a healthy income, with the added bonus of generous tax breaks, such as the ability to offset mortgage interest, maintenance and management costs against the rent.
“On top of this, any property bought can be inherited by your children via your estate, whereas many annuity products will only pay out during an individual’s lifetime and the payments stop when they die â?? in contract.”
Advice from property investment experts
There are many elements of buy-to-let investment that you need to be aware of, such as the effect it can have on your current tax and inheritance situation, and your legal responsibilities. You should also be aware that unlike other investments, such as bonds and shares, the money for a buy-to-let investment must first be removed from the pension, so it won’t benefit from continued growth, free of capital gains tax.
There are many benefits to buy-to-let investment, one being that you have more control over your investment and the decisions you make.
“We’re already receiving enquiries from people looking into their investment options and wanting to know more,” says Ricky. “It’s important that you don’t make a rash decision. Although you will, potentially, have access to a large sum of money overnight, this is still your pension, and many people cannot afford for that money to be invested in the wrong place.”
Ricky predicts an increase in open houses, saying: “Open houses provide sellers with a greater selection of buyers and often result in a good price being achieved because of the competitive atmosphere. With a surge of investors competing with first-time buyers it will drive the cost of smaller properties up at a much sharper rate than larger properties.
“This could, in turn, create a sellers’ market again, particularly at the bottom end of the market.”