April 2014: One of the key areas of interest to me in the Budget was the change in pension plans and the removal of the “effective requirement to buy an annuity.” Up until now, most people have chosen to spend their pension pot on creating an income to be used during their retirement, known as an annuity.
In his Budget, the Chancellor announced that from April 2015, people would be allowed to have more freedom to draw down their pension as a lump sum to invest however they choose, at a lower tax rate than is currently the case.
Average annuity rates currently stand at about 6%, from a high of 15% in 1990. At the same time, depending on a property’s sale price, buy-to-let returns can range from 6% to 16% according to lettings agent Drummonds. This return is without considering the benefits of average annual equity appreciation, which Drummonds puts at 5.66%.
To add into the mix is an increasing distrust of financial institutions, and pension providers in particular. Whether it be providers offering annuities at 30% below market rate, or them not taking into consideration health issues when calculating pay-outs, it seems that almost every week there is another pensions scandal.
So what effect will an increase in investment of pension pots into the buy-to-let market have? Some commentators are expecting a potential increase in property value of 30%, whilst others are forecasting figures that are more restrained.
Either way, prices are likely to increase quite substantially over the next few years, which will continue the change towards us becoming a nation of landlords.
One way to counter this will be to increase the number of houses being built, altering the balance of supply and demand. Another is to change our social perception of our house being our castle. The truth is it will probably take a bit of both.