The pension freedoms introduced by the government back in April were intended to give retired people far greater control over how they used their lifetime savings.
Rather than buying an annuity – as had been effectively the default option for the majority of retirees – there is now far greater scope to invest. The stock market and similar assets are expected to be the most popular option, primarily through drawdown schemes. But the new rules give savers the chance to take money out of their pensions to use in other types of investment, most notably buy-to-let property.
Figures published recently by analyst Moneyfacts.co.uk show that the number of mortgages now aimed at buy-to-let borrowers passed 1,000 in August for the first time in seven years. The firm says this is in direct response to the number of older people enjoying their new-found freedom and using pension cash as a downpayment on a second home.
With high demand from tenants, rents rising faster than inflation and borrowing costs still cheap, it is easy to see why so many people are considering becoming a landlord. But there are a number of potential clouds on the horizon that should make would-be buy-to-letters stop and think.
With the base rate stuck at 0.5% – as it has been for more than six years now – the cost of borrowing to fund a property purchase is as low as it has ever been. On this basis, the potential profit to be made from buy-to-let is considerable.
But the consensus among economists is that the Bank of England will finally get round to raising rates within the next 12 months, and possibly much sooner if the economy continues to bounce back.
This means higher mortgage repayments for landlords on tracker deals, while those with fixed-rate loans will be hit when time comes to remortgage. Anyone thinking about buying another home should realise that there is only one way interest costs are likely to go.
Cost of withdrawals
Taking a large chunk of money out of a pension to use as deposit on a property is certainly a lot easier now, but the cash will still be subject to tax at your marginal rate. If you’ve got other income that takes you into the basic-rate bracket, for example, any money you withdraw from your pension in that financial year will be taxed at 20% at least.
New tax regime
That’s not the only tax issue: in his summer Budget, Chancellor George Osborne announced that from 2017, landlords would no longer be allowed to offset the cost of mortgage interest when calculating their tax bills, as is the case at present. Although this change is being phased in gradually, it will erode landlords’ profits in the long run.
A full-time job
Finally, being a landlord can bring its own challenges: your tenants have a number of rights that you are responsible for. Of course, you can employ a managing agent to deal with these issues, but this will again eat into your returns.
The picture is pretty rosy for landlords at the moment. But the big question is, how long will the current situation last? If things change, a lot of buy-to-let investors could be left regretting their decisions.