Will the pension reforms boost house prices in the UK?
- Many experts are deeming the forthcoming pension reforms will boost house prices in Britain. Auction House London explores the reasons why the reforms to pensions are likely to push up property prices in the UK in 2015.
- The effect of the Budget on PensionsIf you are over the age of 55 in the UK, then April is going to be an important month. You will be able to withdraw part or if you wish, all of your pension, in a lump sum. Not only that, but you can spend it in any way you like, rather than being forced to buy an annuity.
For some, the property market will hold an appeal as a way of using their windfall wisely in bricks and mortar. The buy-to-let market has been very popular in recent years, offering a healthy return on investment. As house prices increase there are more and more people who cannot afford to buy, looking for rented accommodation.
Since 2001, the private rented sector has expanded by nearly two million households – an increase of 71.4 per cent.
More than one in 10 plans to grab their entire lifetime savings and it is suggested that 16 % of those people want to reinvest their money in property.
Avoiding tax under the new scheme
There could be a property boom in this sector, with the introduction of what are being called “Silver landlords”, with a figure cited of 50,000 people this year alone, potentially buying a property.
There are some controlling factors in the form of tax implications. The first 25 % withdrawn will be tax free; however the remaining 75 % will be taxed as income, which could be at 45% if taken out as a lump sum.
The main beneficiaries of this will be those who have built up relatively large pension pots, who will be using these reforms to avoid paying 40% tax when they draw it.
An example would be if you have a £200,000 pot, you could cash it in and have £50,000 tax-free, but the £150,000 would be taxable. However, an individual could decidesto take the pension as £50,000 every year for four years and use one of the attractive loans now being offered, in order to buy a property. Then they will receive £12,500 tax-free and only be liable on £37,500, which would be as low as £5,500.
People with lower saving pots could also draw out over four years and if the taxable figure is below the new personal allowance, could find themselves paying no tax at all. Although state pensions, will also come into the equation.
The effect of new ISA’s on house sales.
Another leveller, that may have a bearing on the numbers using their savings to buy property, could be the new ISA that will be available for first-time buyers. For every £200 saved, the government will add another £50. So if someone puts in £12,000, the government will respond with £3,000 more. This may affect the numbers of people investing their lump sum in buildings in the short term, but over the next five years they may also enter the property market.
It is difficult to see house prices staying the same or dropping. With more money available, loan offers better than ever, pension freedom and a steady rise out of recession, 2015 looks set for house price increases.