We know the government is changing rules on pensions this April and I have discussed this matter with landlords and financial advisers and the subject has certainly created a lot of questions from landlords.
Therefore, I thought it might be worth taking a more in depth look at pension and the property market in Uxbridge and the surrounding area.
George Osbourne, in the budget last year announced pension reforms which come into effect in April. The reforms give people with pension’s access to their pension pot and the freedom to look for alternatives to annuities. In summary, after the 6th of April, anyone aged over 55 will be allowed to withdraw all or part of their pension pot and spend it as they wish. Until now, you were allowed to take out a quarter of it and were forced to buy an annuity policy with the rest.
But sadly it’s not all good news. There are potential stings in the tail if you decide to draw down too heavily. The sting is in the form of tax. There are some hefty tax implications by taking money from your pension pot. As per the previous rules, the first 25% can still be withdrawn from the pension pot tax free but, if you take more than a quarter of your pot (25%) it will be taxed as income at your prevailing rate. So if you took the full value of your pension out, the first 25% will be tax free but the remaining 75% will be taxed at your income tax rate of 20%, 40% (or even 45% if you earn over £150,000 a year). Given it’s a tax advantages that might not be your best course of action.
Choices, Choices
Under the old scheme, if you bought an annuity, when you died your annuity normally died as well. All your money is invested and there are no assets left over to be inherited by your children or the cats home. Also, the returns from pensions are awful at the moment, reflective of current interest rates and a lacklustre global economy. The best rates according to Hargreaves and Lansdown (who are respected Bristol based Savings experts) state if you were 55 years old, the best rate you would get on your annuity pension would be around 4.5% fixed for life (so it would never go up) or 2.2% but the payment would go up with inflation. At 65 the rates are of course better as they have ten years less to pay out, 5.6% (level) or 3.3% (RPI linked).
The sort of rates (also known as yields in the property investing game) being achieved in Uxbridge are in the order of 3% (for larger property) to high 6.5%+ for studios. Rents are subject to market conditions but generally increase in line with inflation.
Annuity Rates vs BTL Property Returns
The other aspect of property investment is how the fact property values have risen consistently over the last 50 years. According to the Office of National Statistics, the life expectancy of a 65 year old male in Hillingdon is 19 years (the national average is 18 years and 7 months, in Slough it’s only 17 years 9 months, but Harrow has one of the longest life expectancies of 21 years and one month).
If we roll the clock back 19 years to March 1996, property values in Hillingdon have risen from 82,530 to 330,088 in Jan 2015. An increase of by 288% to today… you wouldn’t have had that with your pension! But this is the biggest win, even by taking a hit in income tax now, by buying a property, you buy an asset that you can pass on to your family when you die…. (or the local Dogs Trust at Harefield if they aren’t nice to you!).
It should be said that the past is no guide to the future. But a buy to let property could well have a place alongside an annuity.
So where next?
It totally depends which strategy you are going to look at, one strategy is to look to achieve relatively small rental returns (ie low yields) in an up market area which has decent capital growth or, alternatively, another strategy is to buy properties in not so good areas known to produce a high returns (i.e. high yields) but low capital growth (ie how much the value of the property goes up). Now, I am not financial advisor, so cannot offer financial advice on what the best thing for you with your pension is.
However, I can offer knowledge and experience of the Uxbridge property market, what to buy, what not to buy and where to buy. My thoughts on the Uxbridge Property market can always be found on the Uxbridge Property Blog
