We get some pretty rubbish press releases in the MoneyWeek office. But today brought one of the most dim-witted any of us have seen for some time. The headline warned that first-time buyers have “only one month left to get on the property ladder.”
You will wonder why that is. Perhaps there are some new lending regulations coming in? Perhaps Help to Buy is to be shut down? Or perhaps there’s to be an age restriction on home ownership?
Actually it is none of these things. Instead as the press release goes on to explain, “when the new pension rules come into force in April, a surge of pensioners will draw down their funds to invest in the property market. This will drive up house prices and leave many first-time buyers stranded.”
What’s more, first-time buyers won’t be able to get mortgages anymore. That’s because “mortgage lenders may turn attention away from offering good high loan to value (LTV) mortgages in favour of the less riskier lower LTV mortgages in the buy-to-let market.” This is nonsense. Absolutely total nonsense.
There has been much talk about pensioners using their new pension freedoms to withdraw all their money in one huge lump sum, which they will then pour into the only market they really trust – the UK property market.
But while there is no doubt that people will be talking about doing this, once they’ve looked at their tax situation and at the difficulty of getting mortgages in later life (most mortgage lenders insist you are under 75 at the end of a mortgage term), it doesn’t seem likely that they will actually do it.
Let’s look at the tax situation. Pensions are usually referred to as tax-free savings. And they are – on the way in. When you save into a pension, you get to do so without paying any income tax on the money in question first. But pension money stops being tax-free when you withdraw it. Apart from the first 25%, which comes out as a tax-free lump sum (and always has done – nothing new here), the rest is taxed as though it were income.
So, imagine that you have a total pension pot worth £200,000. You take 25% tax-free (so, £50,000). You then pay income tax at your marginal rate on the rest.
Let’s assume you have an income of £10,000 a year already (state pension, savings, dividends, etc). Your tax bill will be £58,143 (see here for a helpful calculator). However, if instead you had left the money (bar the 25%) in the pension wrapper and taken out £10,000 a year for the next 15 years, you would have paid a total in tax of £28,200.
You just handed over nearly £30,000 to the taxman totally unnecessarily. That’s nuts. It’s also why 83% of people to whom the tax implications of all this were explained said they would leave their money inside their pensions and take an income as needed rather than take it all out in one go.
First-time buyers, you can relax.