UK pension changes could trigger a significant increase in residential property transactions but for most households, this is unlikely to involve the acquisition of an investment property.
But the increase in sales is more likely to come from continued trend of pensioners selling larger properties and properties in prime areas and purchasing smaller properties and properties in cheaper areas in order to release additional equity to help fund their retirement years, according to real estate firm Chestertons.
In a new report it says that there are a number of reasons that property is likely to prove a popular investment choice for those who decide to take control of their pension pots and invest in something other than an annuity.
These include the fact that residential property is generally seen as a less volatile and relatively safe long term investment, when compared to other assets such as equities and can provide a regular rental income.
Also, a strong capital appreciation over the medium to long term is anticipated and property is a tangible asset that people generally feel more comfortable with and understand better than other more complicated investment vehicles.
If estimates of demand turn out to be accurate then there is likely to be a near doubling in the number of pensioners buying at least one investment property and that would push house prices up.
‘If the properties purchased were then held as rental investments, this would help alleviate the current shortage of rented accommodation, which is especially prevalent in London, thereby stabilising the rental market somewhat,’ said Nick Barnes.
However, he believes that financing a property investment is likely to prove difficult for many 55 plus year olds as lenders have been toughening their stance on borrowers who cannot repay their mortgage before retirement.
‘Buying properties with cash is of course an option, but with the average pension pot in the UK standing at just £25,000, the number of people with enough contributions to cover the cash purchase of a property will be very small, especially in London where prices are much higher,’ he explained.
‘The more likely scenario is that those looking to invest in property would need to supplement their pension pots by selling their existing property and either downsizing or moving to a cheaper area. This said, many pensioners have already taken these options and dipped into their pensions to help their children and grandchildren onto the property ladder so a significant uplift in activity is unlikely,’ he added.
For those that can afford to buy an investment property, identifying the right property to ensure a longer term income stream and capital growth will be the challenge. Location and rentability are key issues and a realistic assessment of operating costs and voids will need to be made, the report points out.
Barnes also said that tax liability is a further important consideration and owners will need to be aware that their rental income when added to their pension or other income could take them into a higher tax band. ‘The good news is that certain tax concessions are available such as mortgage interest relief and CGT allowance (currently £11,000) for private but not company landlords.
‘The pension changes could trigger a significant increase in residential property transactions but for most households, this is unlikely to involve the acquisition of an investment property,’ Barnes added.
‘The increase in transactions is more likely to come from continued trend of pensioners selling larger properties and properties in prime areas and purchasing smaller properties and properties in cheaper areas in order to release additional equity to help fund their retirement years,’ he added.