Changes in UK pension laws could send ripples throughout the UK property industry, as a generation on the verge of retirement ponders how they can best make use of their newfound financial freedom. The new legislation, which was announced by Chancellor George Osborne in December 2014 and is set to come into effect in April 2015, has been described as ‘Britain's biggest pension reform in decades’.
From April onwards, anyone approaching retirement age will have complete control over their pension funds, enabling them withdraw as much of their allocated pension pot as they so choose and to use said funds however they deem fit.
Analysts predict that these new changes could provide a significant boost to the UK property market, especially the buy-to-let market. With its high yields and solid performance, it is sure to prove an attractive investment for these so-called “silver landlords”.
Property investment as a pension plan
Research conducted by financial services firm Hargreaves Lansdown finds that at least one in ten of those approaching retirement age plan to take full advantage of the reforms by withdrawing their entire pension fund from the pot. Sixteen per cent of those plan to reinvest those funds in a buy-to-let property.
The buy-to-let market is performing well, as high house prices results in many people opting to rent instead of buy. The research suggests that those approaching retirement age will reap an average of yield of between 10 and 14% of their investment. This, in addition to the potential capital appreciation, makes buy-to-let a sound investment option for pensioners.
Direct Line for Business (DL4B) found that 43% of prospective 'silver landlords' would consider a buy-to-let investment on the basis that it produces regular income, while 23% are drawn to the security of the investment. Seventeen per cent like the idea of potential capital appreciation while 9% simply want an opportunity to make an investment that will allow them to leave something behind for their children.
There is a catch, however, and that's the tax obligations that come with a career in property investment. Twenty-five per cent of each withdrawal from the pension pot will be tax free, but the rest will be taxed at a marginal rate; meaning that anyone who withdraws the large sum required for property investment could end up handing a significant portion of that over to the tax man. According to Hargreaves Lansdown, an estimated £1.6 billion will be injected into the treasury as a result of large pension withdrawals.
The UK property market will benefit, as the silver landlord generation will provide an additional £5 billion worth of investment. However, it's vital that any looking to use their pension in this way understands that they are embarking a path that requires careful and methodical management of their assets.
A property investor needs to invest wisely if they hope to reap the benefits, regardless of where the funds for their investment originate.
Disclaimer The information and data provided are for general information purposes. They do not constitute investment advice nor can they take account of your own particular circumstances. If you require any advice on investments, you should contact a financial or other professional adviser.