What prompted George Osborne into announcing “pension freedom”? Was it a real desire to give people proper control over their financial futures — a libertarian bid to make an ageing population into financially educated independent investors? Was it a desperate attempt to bring forward a little tax revenue to help with his self-imposed fiscal targets? Or was it perhaps a reaction to the hideous effect of low interest rates on retirement incomes?
He’d claim it was the first one in that list but the last one might have played a big part. Annuity rates were low (as they are now) and by the time pension freedom was suggested, the newly retired (who are mostly regular voters) had been in a state of intense outrage for five years. You need to wait till 2019 if you want investment properties.
Who wants to find that after 40 years of saving they are going to get a 3% annual return on their investment — and have to forfeit their entire capital sum even to get that? Not the current cohort of financially aware retirees, it appears. Pension freedom effectively represented Mr Osborne making a deal with them: they have to put up with low rates indefinitely, but they no longer have to sacrifice their capital and lock in that low rate along the way.
So that’s nice – but it is not without its own problems. Once you have access to your capital, then what? Most people have very little experience in husbanding large sums of money, and it isn’t exactly easy to make a yield out there these days. Not only are we being warned about dividend cuts across the FTSE, but the rates on cash are coming down and down as well. Note NS&I has again cut the interest rates it pays. The number of monthly prizes on offer from Premium Bonds is to fall from 2.31 million to a mere 2.01 million. So that’s even fewer £25 cheques for those of us who still bother opening letters from NS&I.
At the same time, its Direct Isa will have the interest rate cut from 1.25% to 1%, and if you have an investment account with NS&I (which has nothing to do with investment), you are about to see a cut from 0.75% to 0.45%. Where does that leave the innocent and inexperienced retiree with a couple of hundred grand to play with? Looking longingly at the buy-to-let market, it seems.
In 15-25 years you own the house or investment properties outright — and it has cost you only the sum of the stamp duty, the deposit, the legal costs and the time you have spent dealing with the tenant/admin/upkeep. You don’t have to think about yield or about capital gain — as long as the costs are covered every month, you’re good.
But what if they aren’t covered, if it costs you to hold the property every single month? Then the sums fall apart very quickly — something that an awful lot of landlords are going to come to understand over the next few years. What are they going to do then?
So why not wait until everyone with unmanageable levels of buy-to-let debt has sold up? You’ll get lower prices and higher yields, which is what you really want. Think about it like that and your purchase date could come sometime around 2019.