Pension Freedom Day, as it has been labelled, is fast upon us – 6 April to be exact. Its impact has been the topic of much debate since George Osborne announced the reforms in his 2014 Budget statement.
The Chancellor has overhauled the system which steers savers towards purchasing an annuity by imposing a 55% rate of tax on withdrawals above the tax-free portion of 25%.
Under the new rules, retirees will be taxed at the rate which applies to their income circumstances. Scottish Friendly director Neil Lovatt said that property was the most obvious investment for people drawing out their pension pot. But he warned the influx of cash-rich older borrowers to the market would push up prices and draw lenders’ focus away from serving first-time buyers favouring those with large deposits instead.
The question implies lenders are under pressure to choose between different types of customer, but is that really true?
Funding availability has now recovered and is as good as it has ever been (certainly post-crunch) and so does not appear to force a choice between one type of customer and another. Yes, arrears rates on owner-occupied mortgages are around twice what they are in the buy-to-let sector – implying greater risk and higher capital costs. But arrears are low overall (in both sectors), and so may not be a determining factor.
If there are supply constraints, they are in the property market, not mortgage funding. It is sometimes argued that buy-to-let investors displace first-time buyers, but activity by both grew strongly last year. Typically, buy-to-let investors may often be in a stronger equity position. But we have seen a welcome decline in the number of first-time buyers needing help with their deposits, and this group are now being supported in significant numbers by Help to Buy schemes.
The effects of pension liberalisation will probably be shaped by a set of complex and inter-related factors. Many pension pots are simply too small to fund buy-to-let portfolios, although larger ones could have a significant impact if they were all channelled into property. But there are complicating factors, including tax treatment, returns from property investment and its alternatives, attitudes to risk, advice – and consumer perceptions of all of this.
So, will unleashing the silver pound trigger a surge in property investment? We will have to wait and see but, as we saw with the MMR, it may be difficult to judge the effects in the short term.
Source: Mortgage Solutions