We are all
well aware that the pension rules changed in April and I want to look a little
deeper into the subject of your pension and the Southampton property market.
George Osbourne, in last years’ Budget, announced pension reforms that came
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, since 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, 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As before, as per the old rules, the first 25% can still be withdrawn from the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, 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 marginal 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. Hargreaves
state if you were 55 years old, the best rate you would get on your annuity
pension would be 4.4% fixed for life or 2.2% but the payment would go up with
inflation. The sort of rates (also known
as yields in property investing) being achieved in Southampton are in the order
of 5% to 7%, and they tend to rise in line with wages.
The other
aspect of property investment is how property values have risen consistently
over the last 50 years. According to the
Office of National Statistics, the remaining life expectancy of a 65 year old
male in Southampton is 18 years exactly (its only 17 years 7 months in
Portsmouth). If we roll the clock back 18 years to May 1997, property values in
Southampton have risen by 164.65% 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.....Food for
thought.
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). It is best to speak with a financial advisor about your pension pot and
long term wealth management and now, maybe, is the time for property to be
considered in the portfolio.