What pushed George Osborne into announcing “pension freedom”? Was it a real desire to give people proper control over their financial futures — a libertarian bid to make an ageing population into financially educated independent investors? Was it a desperate attempt to bring forward a little tax revenue to help with his self-imposed fiscal targets? Or was it perhaps a reaction to the hideous effect of low interest rates on retirement incomes?
He’d claim it was the first in that list of possibilities. I strongly suspect that the last played a hefty part. Annuity rates were low (as they still are) and by the time pension freedom was suggested, the newly retired (who are mostly regular voters) had been in a state of intense outrage for five years.
Who wants to find that after 40 years of saving they are going to get a 3% annual return on their investment — and have to forfeit their entire capital sum even to get that? Not the current cohort of financially aware retirees, it seems. Pension freedom effectively represented Mr Osborne making a deal with them: they have to put up with low rates indefinitely, but they no longer have to sacrifice their capital and lock in that low rate along the way.
So that’s nice – but it comes with its own problems. Once you have access to your capital, then what? Most people have very little experience in husbanding large sums of money, and it isn’t exactly easy to make a yield out there these days. Not only are we being warned about dividend cuts across the FTSE, but the rates on cash are coming down and down as well. Note NS&I has again cut the interest rates it pays. The number of monthly prizes on offer from Premium Bonds is to fall from 2.31 million to a mere 2.01 million. So that’s even fewer £25 cheques for those of us who still bother opening letters from NS&I.
At the same time, its Direct Isa will have the interest rate cut from 1.25% to 1%, and if you have an investment account with NS&I (which has nothing to do with investment), you are about to see a cut from 0.75% to 0.45%. Where does that leave the innocent and inexperienced retiree with a couple of hundred grand to play with? Looking longingly at the buy-to-let market, it seems.
The last year has seen huge change to the tax regime around buy-to-let: there is to be a three percentage-point rise in the stamp duty payable on second properties and, more importantly, the way tax relief on debt interest works has been changed such that investors can no longer set it against their marginal rate of income tax. Instead they a get a 20% tax credit on it.
This would put me off (big time). It doesn’t seem to be putting many others off. Nottingham Building Society reports that a mere one in seven people “have cancelled plans to buy more or to make their first buy-to-let purchase” as result of the changes. And the people least likely to have been put off are the over 55s.
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Are they right? There are two answers to this. If they have to borrow money to do it today, the answer is absolutely not. Look at why borrowing to buy-to-let has looked so attractive for so many years. You put down a deposit. You get a tenant in. The tenant pays the rent. The rent pays the mortgage and covers the costs.
In 15-25 years you own the house outright — and it has cost you only the sum of the stamp duty, the deposit, the legal costs and the time you have spent dealing with the tenant/admin/upkeep. You don’t have to think about yield or about capital gain — as long as the costs are covered every month, you’re good.
But what if they aren’t covered, if it costs you to hold the property every single month? Then the sums fall apart very quickly — something that an awful lot of landlords are going to come to understand over the next few years. What are they going to do then? I think they will try and sell: the National Landlords Association estimates that half a million flats will hit the market in the next year — and that’s before the tax changes really bite.
But who’s going to buy? It won’t be other retirees with mortgages (they’ll have done the sums already). It won’t be new landlords: they will have too. Even if they haven’t, they will probably find that their mortgage lenders have.
Note that this week the Bank of England’s regulatory arm, the Prudential Regulation Authority, has recommended that buy-to-let mortgages start to come with much stronger affordability tests than they have so far. So buy a classic buy-to-let property with a mortgage now and you’ll give yourself a double whammy: a fast falling net yield and a pretty quick paper capital loss.
Still, the good news is that this isn’t the end of the story. What if you are a cash buyer and you are just after the things that most retirees want? A net yield of about 3%-4% and some kind of confidence that all your capital won’t disappear. Then, assuming you can bear to deal with tenants and upkeep (you don’t have to do this stuff with equities), being a landlord isn’t the worst idea in the world.
I wouldn’t do it — for two reasons. First, property is a very easy thing for a broke government to tax, so I have a feeling there is more to come. And second, I have enough trouble keeping my own kitchen appliances working without worrying about someone else’s. But if that doesn’t bother you, now is a good time to start doing some research — if not a good time to actually buy. UK house prices are high with much of the south looking bubbly (a recent report from Lloyds puts the average house price at 6.6 times average income vs 7.2 times in 2008).
So why not wait until everyone with unmanageable levels of buy-to-let debt has sold up? You’ll get lower prices and higher yields, which is what you really want. Think about it like that and your purchase date is, I think, some time around 2019.
• This article was first published in the Financial Times.