IFAs should be extremely cautious when promoting government plans to allow people to invest their pension pot into residential property as they could be putting themselves at risk, warns pensions expert Stewart Ritchie.
Inland Revenue's second pensions simplification paper published in December last year suggested people will benefit from an increased investment freedom, including the option to put all their pension savings into residential property, when the implementation of the new regime comes into force.
While this might incentivise people to save more for their retirement, it also poses a great risk for both clients and advisers, says Ritchie, pensions development director for Edinburgh-based firm Scottish Equitable.
One of the problems with investing in residential property is that the average pension pot is not 'enough' to spread the risk over several assets, he says.
Under coming rules, a person will only be allowed to borrow a maximum of 50% of the scheme's asset value. With that in mind, a person with a £100,000 pension pot - which is considered to be a "big" pot - would only be able to invest in a £150,000 property.
So even if someone used the maximum he or she could borrow, their pot would still be stretched to one property, Ritchie says.
"This is a phenomenal concentration of risk," he says, as 150% of the pot would be invested in one asset.
Clients who are thinking about going for the new investment option when the legislation comes into effect would not only put themselves at risk but it could also prove to be the achilles heel of advisers as the "scope for disaster is obvious".
"Any IFAs advising their clients to do so would be extremely vulnerable," Ritchie says.
That said, he believes investing in residential property could be considered a sensible option if, for example, Barker's proposal to introduce a property investment fund, would come into effect. This would both diversify the spread of investment and decrease the risk, he says.
In the future, life offices might even be offering residential property funds, he adds.IFAonline
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