Will lifetime pension allowance scrappage drive investors away from the buy-to-let market?
Cornerstone Tax, the UK’s leading property tax advisers, asks if lifetime pension allowance scrappage will drive investors from buy-to-let market.
Chancellor Jeremy Hunt announced the measures of his first Budget earlier this week describing it as a ‘budget for growth’. The key points focused on employment, childcare, business support and pensions. It was unveiled that the lifetime allowance – the total amount workers can accumulate in their pension savings before tax – has been abolished. Adding to this, the pensions annual tax-free allowance will increase by 50% from £40,000 to £60,000.
However, property tax expert and Group Chairman of Cornerstone Tax, David Hannah believes that the abolishment of the lifetime allowance could have a detrimental impact on the already strained buy-to-let sector in the UK.
Hannah states that many people who were subject to this limit, actually went out and invested capital in the private rental sector, because that was the only way to guarantee topping up their income, which otherwise may have been inadequate in retirement. The removal of the lifetime allowance now provides individuals with more options in terms of where they invest their pension, causing buy-to-let properties to become a less desirable option.
When investing in property, utilising it as a buy-to-let home is a common choice for retirees. A study conducted by the National Landlords Association (NLA) found that 40% of landlords in the UK are aged 55 or over and more than half of these landlords consider their rental income to be a key part of their retirement income. Demonstrating the potential benefits of investing in a buy to let property for retirement planning, a recent Landlord Report shows that 62.24% of buy-to-let landlords state they have experienced an increase in demand for their rental properties over the last 12 months as 45% of landlords stated that they plan on investing in more property over this year.
However, property investment is not without its risks. There are a number of obstacles affecting the property market this year, including house prices being the most expensive they’ve been for almost 150 years relative to average earnings according to Schroders. Adding to this, both tenants and landlords are facing significant issues in the UK rental market as data from the Office for National Statistics (ONS) shows that tenants in properties owned by private landlords have faced the highest rise in rent since records began seven years ago. This means that affordability has become an issue for many, however due to a chronic lack of supply in the rental sector, new entrants to the buy-to-let market are still likely to find tenants.
David Hannah, Group Chairman at Cornerstone Tax, discusses:
“I think one of the best measures announced from the Budget is the scrapping of a lifetime cap on a pension fund which has been held at the same level for about 10 years.
“Now, we have the real prospect that people such as senior executives, entrepreneurs, and other high-earning individuals will have a no limits pot that they can put into, which is great, it will provide them with more flexibility and options for their pension.
“However, this could have a knock-on effect on the buy-to-let market. Many people who were subject to this limit previously went out and invested capital in the private rental sector, because that was the only way to guarantee topping up their income, which otherwise would have been inadequate in retirement.
“Now, individuals will have more options in terms of where they want to invest their pension, which could make buy-to-let investing less desirable.
“What we probably need is a liberalisation of the pension funds and investment rules.
“If all that money is going to flow into pension funds, it’s got to be invested in someone. Why not liberalise how you can invest and allow you to invest in yourself or in private companies, because currently, you can’t do that.
“This could also see a rise in investment in small businesses in the UK providing them with a platform to grow – such as those in the construction sector which could aid the undersupply of properties.
“The problem is going to be for pensioners who are already pensioners who don’t have any earned income anymore, they can’t take advantage of this – they will feel stuck with their current pension.
“For people in their 40s or 50s, who may feel that they’re underfunded, or their lifetime allowance wasn’t enough, they now have more opportunities whereas previously, they weren’t given a choice.”
Kindly shared by Cornerstone Tax
Main article photo courtesy of Pixabay
