Buy to let: The natural successor to annuities?
George Osborne’s announcement removing the requirement for savers to purchase an annuity at retirement could lead to a buy-to-let boom, according to some commentators.
But the tax implications of withdrawing the entire pot have raised concerns among financial advisers.
Terry McCutcheon, chief executive of Finance Planning Group, said: “It would be great if it stoked up the buy-to-let market and we got more investors but in reality it may not be as good as it sounds.”
Under the new rules unveiled during this week’s Budget, Osborne will continue to allow retirees to take 25 per cent of their pension as a tax-free lump sum but the remaining pot will be taxed on the individual’s marginal tax rate.
This could result in the individual being pushed into a higher tax band, in excess of 40 per cent, paying Capital Gains Tax on any appreciation in its value on sale and a monthly tax on the income.
Exact details of how this tax will be executed have yet to be worked out as, except for some small changes, Osborne has until April 2015 to thrash this out with HMRC.
The changes have prompted John Heron, chief executive of specialist mortgage lender Paragon to ask government to allow buy-to-let property to be included in self-invested personal pension schemes (SIPPs).
Heron said landlords preferred to invest in property for later life financial security because of its tangible nature, strong lifecycle performance and inflation protection.
He added: “The vast majority of landlords hold just one or two properties to augment other savings and investments but buy-to-let property is unusual in that investors cannot currently hold their buy-to-let property in their pension.”
If buy-to-let investments were ringfenced from marginal tax liabilities it would increase the range of retirement fund options for pension holders.
But Age Partnership retirement specialist Simon Chalk said this may still fail to lure in first-time landlords of a pensionable age.
“Individuals choosing to defer taking their pension until their 60s and 70s may not have the appetite to invest in property which can be a headache to let out and cause the uncertainty of a rental void,” he said.
Unlike an annuity, investment in buy-to-let is not a one-off capital outlay.
Structural risks to the property, redecoration, and routine maintenance can incur regular substantial costs over the lifetime of the asset.
But Chalk said a rental property could pay a higher monthly yield than an annuity.
And with smart advice an individual could mitigate the extent of their tax liability while using the asset as leverage for further investments.
But McCutcheon said annuities remain a good concept which have been adversely affected by low interest rates and a lack of competition.
“I think the way this has been positioned, giving investors the option to go elsewhere, annuity providers will have to get their act together and become more competitive.
“If interest rates start going up by 2015 and annuity providers pick up the baton, whilst it is now just a choice as opposed to an obligation – it may become a good choice,” he said.