Pension rule changes could spark buy-to-let boom
A major change to pension rules due to come into force next month has raised concerns that ‘granlords’ will spark a new buy-to-let boom at a time when the housing market is suffering from an undersupply of good stock.
The change to pension rules was announced by Chancellor George Osborne in last year’s Budget when he explained that new pensioners will gain greater access to their savings by being allowed to cash in annuities.
These changes affect everybody saving into a personal or workplace pension scheme where pay-outs are based on the performance of the fund rather than a final salary.
Although they make it much easier for granlords, as they’ve been dubbed, to invest their pension pots in property, the jury’s still out as to whether this is a good idea or not.
Concerns have been voiced that the 400,000 people who retire every year with an annuity will spark a renewed buy-to-let boom, with some experts saying there will be something close to a ‘feeding frenzy’ at a time when there’s an undersupply of housing in the market. This will further fuel house price inflation.
The pros and cons of pension reform
Vast numbers of pension savers have benefited from tax relief on the basis that they buy a lifetime income. This trade-off almost guaranteed private savers would avoid falling back on the state.
For a pension pot that’s built up over 30 years, it is estimated that 32% of the funds in it will have been generated through tax relief, while for higher rate taxpayers the amount funded by taxpayers could be up to 50%. This costs the taxpayer around £34.5bn a year.
On the other hand, it can be argued that it is only fair to give pension savers who were forced into annuities the chance to change them because the investments have not always performed in line with expectations.
The changes in a nutshell
The maximum lump sum pensioners can withdraw from their savings pot has increased from £18,000 to £30,000, with 25% of that figure being tax free.
Savers with several small pension pots will be able to take up to three personal pensions worth £10,000 each as cash, instead of two worth £2,000. They can also cash in one workplace pension scheme worth £10,000 or less.
And savers who prefer to keep the money they have already invested in a pension pot can take larger sums as income depending on their personal tax rate. The drawdown limit is increasing from 120% to 150% of the annual income pensioners would have received if they had purchased an annuity instead.
As well as this, anyone taking advantage of the rules allowing them to take a quarter of their fund as a tax-free lump sum previously had six months to arrange what to do with the rest of their pension, whether they wanted to purchase an annuity or go into drawdown. However, this rule has now been scrapped as it means that anyone retiring now wouldn’t be able to take advantage of the new rules coming into force in 2015. If you take a lump sum now, you can leave the rest of the fund where it is for as long as you want.
There are pros and cons regarding the new annuities ruling, however, it’s important that the government’s aware of the implications of older baby boomers snapping up even more property. There’s a desperate shortage and this could push prices up even higher. For those looking to buy property, it’s key that they stay up to date with all of the latest rules and regulations for landlords. Here at Assetgrove we can help by managing your property sufficiently and relieving you of the daily stresses of being a landlord.
Image credit: Property Division