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Will pension reforms affect the lettings industry?

Posted on 2015-04-13

Recent changes to pension regulations, which came into effect on April 6th, may see the rise of a new generation of landlords who are reaching retirement age, also dubbed as ‘silver landlords’.

This is because, under the new rules, those aged 55 or over will now be able to fund their retirement by accessing their pension pot as a cash lump sum - instead of purchasing an annuity - effectively enabling them to fund an investment property. 

Here we look at how these new ‘pension freedom’ rules appear set to inspire more people in their 50s to become landlords. 

The potential to transform the property market

According to some analysts, these pension reforms have the ability to transform the property market for those who are reaching retirement age, providing them with another avenue for their investments. As a result, many believe that we’ll see an increase in the number of private landlords and those purchasing for buy-to-let purposes.

Many of these potential new landlords will see the appeal of property as an investment opportunity; because they’ve seen the value of their own homes increase over the course of the past couple of decades.

Some analysts, such as Mark Hayward of the National Association of Estate Agents, believe that these pension freedoms will see a ‘buy-to-let boom’. This is because many in their mid-fifties, with large pension pots, will cash in for a lump sum in order to immediately invest into property, hoping that they’ll see the potential of long-term capital growth - with the opportunity to earn a regular income. With tenant demand continuing to rise, particularly in the capital as one of our recent surveys showed, many landlords are seeing a steady return on their investments, making now a good time for others to follow suit.

How likely are we to see a rise in the number of ‘silver landlords’?

In spite of the enthusiasm for the changes, it appears as though many people will still be unable to afford a second property with their pensions, and many won’t have a large enough pension pot to buy a property outright.

Of course, this doesn’t entirely restrict people, and the money withdrawn can still be used for a substantial deposit for a buy-to-let mortgage, allowing for a more competitive deal.

However, with many older people struggling to get a mortgage, due to a lack of income besides their pensions, there are several pitfalls of a buy-to-let for those reaching retirement age. This is particularly true because some lenders expect landlords to have non-property earnings, in order to ensure that they have money to cover repayments if they don’t have a tenant in the property.

In addition to the potential need for a mortgage without a large pension pot, it’s also worth noting that some will be turned away from the idea - due to the fact that investing a pension pot into buy-to-let property isn’t tax efficient, as you can only take a quarter of your pension pot as a tax-free lump sum.

This means that, if you choose to take more, you’ll have to pay income tax on withdrawals. What’s more, those taking large sums may move into a higher tax bracket, which would mean a 40 or 45 per cent tax bill on the pension withdrawals.

On the plus side, once a buy-to-let property is established, the interest on the mortgage, as well as other costs, can be deducted from the rent, meaning that you only pay income tax on what’s left.

Who’s likely to become a ‘silver landlord’?

With numerous positives to becoming a ‘silver landlord’, alongside the financial implications, it appears almost certain that we’ll see an increase in the number of landlords, with regulation changes allowing people to access large amounts of money, making it possible for them to invest in buy-to-let property. As a result, it is likely that these potential ‘silver landlords’ are likely to be first time landlords trying to secure their futures - as opposed to established landlords with large property portfolios.

If you’re thinking about withdrawing from your pension and investing in property, then there are several steps that you should take.

1) Know the changes to the regulations: Before you commit to any decision, you should make sure you’re fully aware of the financial implications and what you can do with your pension pot, as well as how much it’ll cost you to withdraw full sums. There are lots of helpful websites to help you with this, including .GOV and the BBC

2) Find out more about being a landlord: Likewise, before looking at property, you need to ensure that you understand your roles and responsibilities as a potential landlord. Being a good landlord is a significant commitment, and you need to ensure you can manage such an undertaking before committing. Again, there are plenty of resources to help you make the right decision

3) Take a detailed look at the market: If, after the two above steps, you feel like the move is right for you, then discuss it with a reputable letting agent who’ll take you through the market and the options available to you. A good letting agent who knows the area will be able to provide you with a depth of knowledge on the properties available and whether they’re right for you as a landlord

There are a number of ways that the market might change in response to the new regulations, but it appears likely that we’ll see an increase in ‘silver landlords’. If you think such a move is right for you, then follow the above steps and tread carefully, ensuring you know all the rules before you begin your new investment.

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