The love affair between retirement savers and buy to let property investment is still in full bloom despite looming tax changes.
Buying homes to rent accounts for 14% of all spending of tax-free lump sums taken from pensions, according to investment firm Fidelity International.
Tax changes from April 2016 mean property investors will pay an extra 3% stamp duty on homes they buy worth over £40,000 but do not plan to live in as their main residence.
From April 2017, higher and additional rate taxpayers will also see their mortgage interest tax relief tapered to 20% by April 2020.
This measure, coupled with changes in the way property rental business profits are calculated, will also see the profitability of many buy to let portfolios fall.
Tax free cash spent on property
Fidelity says retirement savers have consistently opted to invest their tax-free pension cash in property, making this the third favourite option after reinvesting or taking the money to top-up income.
Maike Currie, the firm’s investment director for personal investing, said: “Everyone knows how much the British like buying property and buy to let is a popular investment that has generated significant returns in recent years.
“But the time may have come to review whether buy to let remains sustainable on a small scale.”
Currie explained that with the cost of buying investment property increasing as enhanced stamp duty and rising house prices reduce rental yields, potential landlords should also look at other aspects of letting property.
Property funds may be better for investors
“Selling houses may be easy in London and the South, but elsewhere this can take a considerable time and ties up money,” he said.
“Other costs are also involved, such as maintenance, marketing, covering time when a property has no tenant and paying unforeseen bills to mortgage lenders and brokers.”
Currie suggests that many investors should consider putting cash into a property fund that offers a return on income without the hassle of hands-on management of a property.
“The question is do you really want the hassle of looking after buy to let property when you are in your 70s or 80s?” said Currie. “If not, a property fund may be for you.”
Property investment funds can be a good alternative for those who want passive investments, but they lack the degree of oversight that direct investment affords. Being able to choose the property, the finance, the tenant etc. gives you much more control.
In my view, none of the problems facing the buy-to-let sector is insurmountable. But the same rule has always applied: forethought and planning are crucial. Investors stand a far better chance of success if they go into the investment with a concrete strategy and full awareness of the risks.
The latest retirement income market data from the FCA shows that around a fifth of drawdown clients in Q3 used neither the Pension Wise service nor a regulated advisor. Just under a fifth of clients drawing down £250,000 or more didn’t seek advice. The Treasury has on the one hand extended these pension freedoms knowing that it will inevitably lead to an increase in property investment among retirees, and on the other launched an attack on the buy-to-let sector in the form of onerous tax laws.