How pensions freedom will solve the UK’s housing ‘shortage’

A few weeks ago, I mentioned in a blog post that Britain’s housing shortage is less about lack of houses than the way we use houses – see here for the detail, but the upshot is that a huge number of people live in houses with quite a lot of spare rooms. A good many of these people will be ’empty-nesters’ – those whose children have left home, but who haven’t downsized.

Perhaps they haven’t quite got around to it or perhaps they just don’t want to. So there is a view that a large part of the UK’s housing problem could be solved if only the retired could be persuaded to sell up and move on.

This isn’t the kind of thing politicians can (or should) suggest. But I wonder if they might not find that one useful side effect of the new pension rules will be that pensioners start stampeding their local estate agents. Why? Inheritabilty.

The new rules allow you to leave anything remaining inside your pension wrapper on your death to your heirs tax free (they pay their own marginal rate of income tax on withdrawals but no inheritance tax (IHT), or the old ‘death tax’).

That means that if you own a house and other non-pension assets that take you above the nil rate band for IHT (£325,000 for a couple, £650,000 for a married couple), and you want to leave as much money as possible to your kids, you are better off spending the cash from those assets before you start on your pension: the more you can keep in the pension wrapper, the richer your kids will be.

As Martin Bamford of Informed Choice tells The Times: “if other assets are available to provide cash for retirement such as Isas or property that can be downsized – capital gains tax-free – to release cash, then preserving the value of the pension pot and spending this last makes a lot of sense”.

The current conventional thinking suggests that by allowing people to take out lump sums that they might use for Buy to Let, the new pensions freedoms will make the UK’s housing shortage much worse. But think a little more deeply into the problem and you might conclude that it will make things rather better.