Two years after George Osborne’s pension reforms, the Financial Conduct Authority (FCA) has published a Financial Outcomes Review of how the market has evolved since then.
Contrary to warnings expressed at the time, it would appear from the results that those with access to their full pension funds (in effect most people aged 55 or over) have not blown the money on high-performance sports cars, yachts and other luxuries. Rather, many seem to have put most of the money drawn into savings and other investments, thanks partly to a general mistrust of pensions.
The FCA does not state if these other investments include buy-to-let, although at the time the pension reforms were announced, it was predicted that relatively large numbers were likely to put substantial withdrawals into direct rental investment.
One can certainly understand the attractions of buy-to-let for someone – of any age – who suddenly has access to a large pot of money. However, despite growing life expectancy and the over-60s being in better physical shape than ever before, I would contend that one’s time of life, and general state of health, are factors to be considered among late-comers to this market.
For any investor, the best strategy is to go for the worst property in a good location rather than the best in a mediocre one on the basis that an individual can add value to a flat or house but has no control over improving a neighbourhood. However, doing so will involve upgrading and refurbishment work which, if to be carried out on a DIY basis, will obviously be more daunting for a person in their early 60s than someone half that age. So an older landlord taking on this challenge might want to make sure there are friends and family willing to help – or, alternatively, think about sharing the work by engaging in a joint venture with someone of a similar age and position.
Another issue particularly relevant to the pension-funded investor is tax. According to the FCA, 53 per cent of pension pots accessed since 2015 have been fully withdrawn; this suggest that those with larger pots will have paid tax of 20 per cent and 40 per cent on withdrawals beyond the 25 per cent tax-free lump sum.
Therefore let us consider, as an example, the options for someone thinking of spending half their £500,000 pension pot on a £250,000 rental flat in Edinburgh or Glasgow. Paying for the property in cash will lead to half of the withdrawn money (i.e. £125,000) being taxed as income – some of it at as much as 40 per cent. Therefore it would make more sense to use the tax-free lump sum (£125,000) as a 50 per cent deposit and take out a mortgage on the remainder (given no locational or structural problems with the property, age should not prevent a borrower with such a substantial deposit being granted a loan).
Another good reason for not putting too much of a pension pot directly into property is the advisability of having easy access to funds to cater for unexpected circumstances. While property regularly outperforms shares in terms of overall return, the investment cannot be quickly and easily liquidated with a telephone call.
For most adults, rental property remains an excellent investment vehicle, but older newcomers do need to consider issues that don’t necessarily apply to a younger generation. Basically, potential investors need to ask themselves, “Do I really want to get into this at my time in life?”
For the type of person looking forward to an uncomplicated journey through retirement, then sticking with their pension pot and regular income drawdown is probably the best option. But for “silver foxes” up for a challenge, buy-to-let offers not just substantial financial gains but also a new chapter in life that will help keep them physically and mentally at the top of their game.
l David Alexander is MD of DJ Alexander