New pension risk lurking in Autumn Statement

Sarah Coles
Buy to let property
Buy to let property

The experts are warning that a combination of announcements in the Budget and Autumn Statement could lead retirees into a terrible mistake in retirement. The new pension freedoms announced in the Budget and new Stamp Duty rules revealed yesterday in the Autumn Statement could persuade thousands that buy-to-let property is the best option for their retirement income. This could leave them in a horrible mess when things go awry.

The Council of Mortgage lenders announced in September that there has already been a sharp rise in buy-to-let investment - which was up 26% in 12 months and almost 10% in just one month. Increasing optimism, combined with a recovering property market and continued low interest rates, have persuaded people that buy-to-let property is a sensible option.

Patrick Connolly, a certified financial planner with Chase de Vere said that the pension changes announced in the Budget (and being implemented in April 2015) meant that more people were considering it as an investment for their retirement too.
Retirement income

People will have greater flexibility over what they do with their pension, and the opportunity to take out as much cash as they like (subject to a potential tax bill). Connolly said this was already tempting some people down the path of buy-to-let, because it seems to represent the answer to all their retirement needs: "They can see that they own a real tangible asset, rather than a number on a statement from a pension provider, they can benefits from capital appreciation and, through rental payments, could benefit from a consistent and regular income."

The changes to stamp duty will make this kind of investment seem even more attractive. The old slab system increased stamp duty on the entire value of the home when you passed each threshold, whereas the new system means you only pay the higher rate on the portion of your home that falls into each band - like income tax. Under the new system you pay nothing on houses worth up to £125,000, 2% on the portion of the home worth up to £250,000, 5% up to £925,000, 10% up to £1.5 million and 12% on everything over that.

The key is that 98% of people will pay less stamp duty under the new system, and only those buying a home worth £937,000 or more will pay more. It means that an overwhelming majority of buy-to-let properties will be subject to less stamp duty, making a purchase more affordable, and opening up the possibility for more people.

The problem

However, Connolly warns that retirees too easily overlook the downsides of buy-to-let, which can leave them in serious financial difficulties. For a start, he says: "It should be remembered that property prices can fall as well as rise and this could be a real danger when interest rates start to rise and mortgage payments become more expensive."

At the same time, the rental income could not be as smooth as people anticipate. He says: "There is also the risk of not being able to find any tenants for prolonged periods or the tenants in place might create unnecessary hassle, cost and inconvenience." If you are relying on this income to meet day-to-day outgoings in retirement, tenants who refuse to pay up for a month or more could leave retirees with nothing to live off.

Then, of course, comes the issue if you ever want to sell, because you may not have any control over the timing of the sale and the state of the property market when you need the cash. It could mean you are left for months or even years with all your money stuck in one or more properties you cannot shift - and it might mean you receive far less than you were expecting from the sale.

In other forms of investment you can reduce the level of risk you are exposed to by investing in a basket of different things, so you have spread the risk. This doesn't tend to be possible with buy-to-let because most people cannot afford to buy a large number of properties and other assets in order to spread the risk sufficiently.

Is it right for you?

The experts say that there will be a role for buy-to-let for a limited number of people who have a broad range of investments. However, if people wander into buy-to-let without considering the pitfalls, they could be left in serious financial trouble.

It makes it even more important that people have the advice and guidance they need on retirement so that they can weigh up all the risks carefully. Of course, the fact that the government failed to announce how it plans to do this during the Autumn Statement will mean commentators continue to question whether the new guidance process can protect people from the new and alarming pension risks.

But what do you think? Are you considering buy-to-let? Let us know in the comments.

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