The new pension reforms – what do they mean for property
Date of Article
Mar 23 2015

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23 March 2015, If you're coming up to retirement you must have pricked up your ears when pensions minister Steve Webb suggested that his new reforms would enable you to go out and buy a Lamborghini from your pension pot. You could even go for their Huracan Coupe model at around £180,000.

Now that's an awful lot of money to spend on a car; for that sort of figure you could get quite a reasonable buy-to-let property in York. So will canny Yorkshire pensioners be piling into property?

The background to the reforms has been well flagged. In addition to the 25% tax-free lump sum in a Self Invested Personal Pension (SIPP), you can now do what you want with the remaining 75%, (though your drawings will be subject to income tax. Your financial adviser will explain).

There are all sorts of reasons why pensioners might prefer to see part of their retirement funds invested in property.

The best property has outperformed the stock market in recent years and that's only in capital terms. If you assume a net yield of 5% on a buy-to-let, then add on the 10% annual capital growth currently seen in central York, you land yourself a whopping 15% per annum. Returns on rural property tend to be lower but can be enhanced by holiday lettings.

Ed Stoyle, partner and head of Residential at Carter Jonas in York, said: "This is already happening in York, where I am seeing my shrewder clients carefully choosing the very best locations they can afford, even if that means a smaller property. You can pick up a compact studio flat in York's BIBA House for as little as £105,000 and know that you'll find an instant tenant at a good rent. The prospects for capital growth are good, too."

"Property diversifies the portfolio and spreads the risk. You feel more in control of it. Gilts and shares can be pretty dull but property is hands-on, tangible and interesting."

If you want to buy a property out of your tax-free sum you'll probably need a SIPP valued at over £750,000 – a figure most of us can only aspire to. But if you don't have the money, just put down a deposit and borrow the balance on a mortgage, say some financial experts. Age is no great bar if you're brave enough to risk it.

This may not appeal to the cautious but there is another slant if you don't fancy that one.
Retirement often also means downsizing your own property, with a resulting tax-free sum that may be substantial. Previously this provided valuable liquidity for the future but with open access to your pension, there's more of an inclination to put this nestegg into property. The ripples from these reforms spread further than you'd think.

York has just been voted one of the UK's best places for retirement and there's much to be said for buying ahead of the game. People are seeking out apartments that will suit them in a few years, then letting them to ensure they earn their keep in the meantime.

So if it's such a good idea, why isn't everyone doing it?

For a start, you need a pretty chunky pension. In addition, you can't put residential property into your SIPP. And remember, property ownership is not just an investment, it's a business, with all the problems that brings. If it's not burst pipes, it's the tenant from hell and you may not want all that hassle as you get older.

There are also, of course, significant tax incentives to keep funds within your pension, not least the Chancellor's Budget announcement that pensions can in future be passed on free of inheritance tax. You can't do that with property.

Nevertheless, my prediction is that 2015 will see more pensioners than ever adding property to their investment mix. They could do a lot worse.