Posted on 16 April 2014 by
For better or for worse, the pension changes outlined by George Osborne in the recent budget appear to have the support of all three parties, and although when they are finally implemented changes may have been made to the actual workings, it seems likely that people approaching retirement will have more access to their pension pot, and therefore greater choice as to how to use it.
As a recap, the plans allow for someone to draw down their entire fund, and be taxed on that fund at the level of income tax they paid in that year. So, if you were a basic rate tax payer (20% at present) in the year you draw your pension you can take your whole fund, with 25% tax free and the rest taxed at 20%, rather than the 55% you would have paid before. At a stroke investing in properties may become more accessible to the newly retired than before (although, bearing in mind that the average pension fund in the UK is around £30,000 this will only apply to those retirees lucky enough to have large enough pension pots to consider this option, given average house prices that would have to be around £150,000 plus). Instead of buying an annuity that money can go towards buying an investment property. This could have the affect of not only providing an income for the client, but also potential capital growth as well as having an asset to pass onto the next generation. An annuity just provides income (although with no potential gaps as you might have with rent) but no capital growth and nothing to pass onto the kids.
So are we going to see a sudden increase in silver landlords? Well I suspect that this depends heavily on the advice that people seek out when looking at their retirement income. And this is the absolute key – people looking to maximise their income need to speak to an independent financial adviser, a tax adviser and a mortgage broker to make sure every angle is covered. Bad advice at this stage could ruin the last 25 years of people’s lives, and I cannot emphasise this enough - people very often underestimate how long they will live for, and any structure needs to be able to provide enough income, in both good and bad economic cycles, to cover their needs. At Towergate Financial Group we offer both expert mortgage advice through John Charcol and excellent financial advice via Towergate Financial, to aid with retirement planning, both when you are still working and when you are due to retire.
So maybe these changes will have an affect on investment properties; but what about interest only residential mortgages? Now that more money could be taken out of your pension than previously available, will lenders allow personal and occupational pension schemes to be used to cover more of the capital repayment upon maturity of the loan? At the moment some lenders will allow clients to use 25% of their projected pension pot as a lump sum repayment strategy.
We may well see this open up to 55% of their pot, so offering a potential greater flexibility when looking at a client’s overall repayment strategy. Whether using your whole pension fund to pay off your residential mortgage is a good idea requires further discussion, again with your financial adviser, tax adviser and mortgage broker.
Clearly we do not know how the ultimate changes will affect financial services, in terms of annuities, income investments and mortgage lending; or how this will impact onto clients, both those who are working, who are due to retire or those who have now stopped work. But one thing is very clear. You need expert financial advice in all areas of your retirement planning at all stages of your saving, investment and draw down. Failing to do so could tarnish your golden years beyond all recognition.
The blog postings on this site solely reflect the personal views of the authors and do not necessarily represent the views, positions, strategies or opinions of John Charcol. All comments are made in good faith, and John Charcol will not accept liability for them.