Is the increased flexibility in how retirees can take their pension leading to more interest in property? Fiona Murphy finds out.
The changes introduced in the Budget ushered in a greater range of pension flexibility. In my previous feature "A NISA Retirement" (Retirement Planner, May 2014), I focused on how the New ISA would be used as a vehicle by many retirees to complement pension planning.
While previously retirees sought alternatives, it is clear this appetite has been fuelled by the government's pension rule changes.
As Retirement Adviser director Nick Flynn says: "We are finding increasingly that people are having more interesting ideas on what to do with their pension.
"Traditionally, these people would have taken their tax-free cash. With more flexibility, people are thinking bigger. You can use your whole pension."
Searching for income
Buy-to-let (BTL) seems to be the word on everyone's lips right now with a great deal of media coverage and interest.
Research from buy-to-let firm Platinum Property Partners recently found that buy-to-let investors expect income from their rental properties to bolster their annual retirement income by nearly £19,785.
The research of 500 buy-to-let investors also showed that on average, they believe the income from their property investments will make up more than half (56%) of their overall annual retirement income.
Interestingly, previous research from the firm had also found that "more than a third (35%) of middle income adults approaching retirement, who are not already buy-to-let investors, are either actively considering buy-to-let or would consider it as an investment option in the future".
This mostly stemmed from the belief it would offer "a better investment opportunity than conventional retirement savings such as pensions", the research highlighted.
Despite this interest, the market seems to be experiencing a bit of a dip of late. The latest Mortgages for Business Complex Buy-to-Let Index found that gross yields on vanilla buy-to-let properties dropped to 6.3% in Q2 2014, down from 6.4% in Q1. This comes as modest rent rises have been outstripped by rapid growth in property values.
But more complex properties, such as houses in multiple occupation, saw gross yields of 9.3% in Q2 2014. While this is also down slightly from Q1 (9.6%), this gross yield was 50% higher than for other properties.
The research also found that the choice of buy-to-let mortgages has reached a record high, with an average of 637 different products available to UK landlords in Q2.
Compared to the previous quarter, when landlords had a choice of roughly 586 mortgages, this represents growth of 8.7%. On an annual basis, this leaves the number of buy-to-let mortgage products 37% greater than in Q2 2013, it said.
Mortgages for Business managing director David Whittaker says: "Within the space of six months, the UK property market has seen a rising tide of optimism translate into steadily rising property prices.
"But with the ying of capital appreciation, landlords are also facing the yang of a dip in rental yields as rent rises have not kept up with increases in purchase prices."
It is evident that the market is not without its issues, but there are valuable things buy-to-let investors should bear in mind.
Platinum Property Partners managing director Tony Bennett says: "Anyone approaching retirement will be looking to maximise the income they are set to receive from all of their investments – buy-to-let investors are no different.
"But increasing income from buy-to-let property is not as straightforward as waiting until you reach retirement age and simply snapping up more properties.
"Planning your investments well in advance is the best approach to ensure you secure a reliable income.
"This has been put into even sharper focus following the recent government announcement of changes to pensions and annuities, and the interest this has piqued among investors."
The research is significant and there is interest, but is it translating to property investment among advised clients?
According to Flynn, he has seen increased interest in buy-to-let, but it is just that – enquiries and preliminary interest.
"With defined benefit, people are retiring with large funds and therefore have the opportunity to do it. We've seen enquiries and thoughts on investing in buy-to-let. They ask, could I do this?
"However, at the moment they are basic rate taxpayers. You have to explain to them, as soon as they access their pension in one go and become higher rate taxpayers, you feel they become a bit deflated as they have in their mind they have £200,000, less 20%, and when you explain it is 40% they don't want to do it."
He adds: "People are just at the stage of thinking of it as an option. I don't think they have fully understood it.
"One example is I've had people inactively accruing and saying they want to cease that and invest in a property instead of a pension. They are so early in the thought process.
"We are pointing out issues at the word ‘go' because it is something they have not thought about properly as yet."
Meanwhile, Almary Green managing director Carl Lamb warns that the buy-to-let market is often not very attractive and his clients are often aware of that.
"I think for a lot of people, they feel the market is disproportionately high. The yield on your money is not very attractive. Outside of London, you are only making 3%-4% and people realise they are having to tie up a lot of money in capital that isn't liquid."
It is apparent that buy-to-let is not something that people can jump into lightly and is not suitable for everyone.
Bennett adds: "There has been much made of the changes to pensions and annuities announced earlier this year and this may well have increased the number of people considering buy-to-let investment as they approach retirement.
"But the fact that so many plan to sell their properties at the very time that they could benefit from the income they generate suggests they are unaware of how to maximise their investment.
"Healthy income can be achieved in retirement through property investment, but it needs to be researched, planned and approached in a business-like manner. Waiting until you are at the point of giving up work is not the best option.
"People should always research and seek advice, whatever type of investment they are considering. And this is particularly true for buy-to-let investors, especially as our research shows there is a worrying lack of knowledge among existing landlords."
The 'property is my pension' view can have pitfalls for retirees. Retirees should therefore invest in a wide range of products instead of putting their eggs in one basket. Property can be a valuable asset, but should remain one component of retirement planning.
We may see more interest as people are able to access their pension funds to a greater extent next April. But in the meantime, retirees and their advisers should consider their options carefully.
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