How Radical Reforms To Pensions Will Impact The Property Market

We’re just weeks away from the most radical changes to Pensions in almost a century and already the vultures are circling. If you haven’t noticed them already, you will see a huge proliferation of  advertising from an assortment of players in the pensions and property industries, all seeking to earn fees/commissions from your new found ability to liberate your pension.

From April 6^th  if you’re over 55 and have a defined contribution pension suddenly the world becomes your oyster. Chancellor George Osborne said in his Budget, “This government believes in the principle of freedom. Individuals who have worked hard and saved responsibly throughout their adult life should be trusted to make their own decisions with their pension savings”. So in the blink of an eye, instead of being forced to purchase an annuity you can take up to 100% of your pension pot in cash and spend/invest it in whatever you want. Doubtless they’ll be an upsurge in sales of new BMWs or Mercedes but it is expected that most people having saved for years are not going to go too much off the rails. But this is an opportunity that could tempt many to plunge their lifetime savings into the property market and become buy-to-let landlords.

For those wealthy enough to drum up a big enough deposit or buy outright, this is a very popular way to generate an income and potentially make capital gains in the longer term as house prices continue to rise in many parts of the country. Newly-flush pension savers might well jump at the chance to join Britain's growing army of landlords, given that interest rates remain stubbornly low and shares are volatile - notwithstanding the FTSE 100 recently hitting a record high.

Despite the various initiatives to help first time buyers on to the property ladder (including the yet to be tested Help To buy ISAs)  the numbers of first time buyers have still not risen appreciably, yet at the same time, property prices at the bottom end of the scale are very much bubbling upwards. This means the lower end of the market is being dominated by Buy To Let investors and, if the wave of pension money washes into it, as expected, prices will rise further and first time buyers will continue to be thwarted. In this scenario, the only thing that will keep prices from increasing (absent political interference) is if the UK’s House Builders can dramatically increase the supply of new housing stock to balance demand. Given the volumes they would have to build per annum, this is about as likely as being able to pour hot tea from a chocolate teapot! Of course, there is the small matter of the forthcoming General Election to be settled, which I would expect to hold back the wave of pension money crashing over the property market for the next few months, at least. However, depending on the political hue going forward, it is likely to be full steam ahead.

But there are pitfalls to accessing buy-to-let in this way, first and not least the huge tax bill you could face if you withdraw all or a large portion of your pension to buy a property - a move that could easily propel you into the higher 40 per cent or even 45 per cent tax bands. That's before you even embark on the process of finding and acquiring the right property, filling it with suitable tenants, and dealing with the administrative hassles of being a landlord.

And, as with any bandwagon jumping opportunity, the purveyors of snake oil will be out in their droves and would be landlords will need to take great care with whom they engage.  Purchasing a buy-to-let property can be daunting. It's a decision with long-term consequences and, apart from your own home, is likely to be your largest financial commitment.  At Martin & Co, Chelmsford we understand the pressures that you will feel in getting this decision right, so whether you're a first timer, or a seasoned buy-to-let investor we are here to help you. If you're currently considering buying to let, give us a call on 01245 330500 or pop in to see us at 15 Duke Street and we'll talk you through the pluses and minuses of different locations, property types, yields etc. We're specialist Letting Agents and we'll tell you the real story. No snakes, no oil.