In the wake of the pensions shake up, one of the investment options coming under scrutiny from the over 55s is property
Becoming a buy-to-let investor can deliver long-term, stable returns; and with mortgage rates at an all-time low, it’s a form of investment that has been drawing interest for a number of years. But is this a smart way to use pension savings?
Tony Harris, founder and managing director of Institute of Financial Accountants firm Contractor Financials, says: “There is certainly nothing wrong with using a buy-to-let investment as part of your retirement provision. However, our advice would be that it should form part of an overall investment strategy, rather than an all-or-nothing scenario, as clients often overlook the downsides.”
Like most investments, a buy-to-let property has its risks. It also has associated costs. For example, purchase costs include legal fees and potentially stamp duty. There may be periods with no tenant, which means no rental income to help pay any outstanding mortgage on the property, or on-going maintenance costs, insurance and council tax.
Although property prices have risen over time, there is no guarantee that this will always be the case.
Harris adds: “The political parties are currently falling over themselves to pledge ever higher numbers of new house builds. A boom in house building could potentially have a dampening effect on property values and demand for rental properties.”
Using a pension pot to purchase a property could incur a hefty tax bill, as 75 per cent of the funds released will be subject to income tax. In addition, any rental received is also viewed as taxable income. There could also be capital gains tax to pay on profits due to a rise in house prices.
More than two thirds (70 per cent) said they wanted to get rid of their annuity because they had been forced to buy one, while almost half (45 per cent) would want their entire remaining fund back if they were to go ahead and sell up.
Last year the government announced proposals to give existing retirees with an annuity the chance to enjoy the same pension freedoms as those yet to retire. It is now consulting on the creation of a second-hand annuity market, where third parties could buy an annuity and receive the income from it for the rest of the seller’s life, paying a lump sum to the person selling the annuity in return.
From April 2016, the 5.5 million people already taking an income from their pension will have the freedom to use that capital as they want, either taking it as a lump sum, or placing it into drawdown and using it more gradually.
In some circumstances it is possible to sell an annuity now, however this currently incurs a 55 per cent tax charge, rising in some cases to 70 per cent. Under the new annuity selling scheme this charge would be removed, so people are taxed only at their marginal rate.
Taking expert advice
Some experts insist that the UK market remains well suited to annuitisation. The Pensions Policy Institute, an influential think-tank, says factors such as tiered tax rates, a relatively low state pension, the existence of free healthcare through the NHS, and a sophisticated annuity market means it could be an advantage to securing a regular income.
Nevertheless, the news that pension annuity rates have hit an all-time low can only add to the confusion and concern that many people will now have around their post-pension freedom retirement plans.
“It is particularly unfortunate for those who may have deferred making a choice until the introduction of the pension freedoms but since decided that an annuity is still the most suitable product for them,” said Richard Eagling, head of pensions at Moneyfacts.
What it does emphasise is the importance of getting maximum value from pension savings. That means taking expert professional financial advice, carrying out thorough research of the market, comparing rates and quotes, and factoring in any lifestyle or health issues that could mean eligibility for an enhanced annuity.
In spite of the freedom of choice around pensions, nothing else provides the security of an annuity, which is why many retirees are expected to stick with one, or, depending on the size of their pension pots, combine an annuity with a portfolio of funds and alternative investments that carry a higher level of risk.