Tuesday 14 April 2015

New Pension rules could change the Epsom Property Market forever

In a recent article, I mentioned that pension rules are changing on the 6th April. It certainly created a few emails, with people asking questions about it. Therefore, this week, I want to look a little deeper into the subject of your pension and the Epsom property market. George Osbourne, in last years’ Budget, announced pension reforms that come into effect this April, which will give people with pension’s unprecedented access to their pension pot and the freedom to look for alternatives. In a nutshell, after the 6th of April, anyone aged over 55 will be allowed to withdraw all or part of their pension pot and spend it as they wish. Until now, you were allowed to take out a quarter of it and were forced to buy an annuity policy with the rest.

However, my readers always know that I like to tell it ‘as it is’. There are always two sides to a story, good and bad. Let me tell you the bad news first. There are some hefty tax implications by taking money from your pension pot. As before, as per the old rules, the first 25% can still be withdrawn from the pension pot tax free but, here is the sting in the tail, if you take more than a quarter of your pot (25%), anything above that initial 25% level will be taxed as income. So if you took the whole lot out, the first 25% will be tax free, but the remaining 75% will be taxed at your income tax rate of 20%, 40% (or even 45% if you earn over £150,000 a year).

 ...and now the good news!

Under the old scheme, if you bought an annuity, when you died your annuity normally died as well. You would have no asset to pass on to your family. Also, the returns from pensions are awful at the moment. The best rates according to Hargreaves and Lansdown (big wigs in the City) state if you were 55 years old, the best rate you would get on your annuity pension would be 4.4% fixed for life (so it would never go up) or 2.2% but the payment would go up with inflation. The sort of rates (also known as yields in the property investing game) being achieved in Epsom are in the order of 3% to 5%, although recently I helped a client get over 7%!

The other aspect of property investment is how the fact property values have risen consistently over the last 50 years (capital appreciation). According to the Office of National Statistics, the life expectancy of a 65 year old male in Epsom is 20 years and 4 months (its only 19 years 5 months in Reigate and Banstead). If we roll the clock back 20 years 4 months to December 1994, property values in Epsom have risen by 271.08% to today... you wouldn’t have had that with your pension! But this is the biggest win, even by taking a hit in income tax now, by buying a property, you buy an asset that you can pass on to your family when you die.... (or the cats home if they aren’t nice to you!).

So where next? It totally depends which strategy you are going to look at, one strategy is to look to achieve relatively small rental returns (ie low yields) in an up market area which has decent capital growth or, alternatively, another strategy is to buy properties in not so good areas known to produce a high returns (ie high yields) but low capital growth (ie how much the value of the property goes up). Now, I am not a financial advisor, so cannot offer financial advice whatsoever on what the best thing for you with your pension is. However, I can share my knowledge and experience of the Epsom property market, what to possibly buy, what not to buy and where to buy etc etc. My thoughts on the Epsom Property market can always be found here at the Epsom Property Blog or you can email me at ian@directresidential.co.uk.

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