The flagship of the March 2014 Budget was the Pensions Reforms crafted by Liberal Pensions Minister Steve Webb and enthusiastically backed by the Chancellor.
Pensioners will soon be free to do what they like with their retirement savings after the chancellor promised to scrap compulsory annuities in a bombshell for the pensions industry. The move almost immediately wiped £5bn off the value of shares in the firms that provide annuities – and provoked fears of a fresh buy-to-let boom as pension pots are used to buy property as a retirement income.
The theory being that pensioners didn’t need to be nannied and could take what risks they wanted.
“We expect the individual annuity market to shrink by 90 per cent . . . we forecast that only 10 per cent of customers will now buy an annuity.”
It was likley that the Chancellor was not unadverse to a dramatically increased demand for buy to let. After all he had widely been reported at Cabinet as saying a pre-election house price boom would be welcomed. If house prices now lagging he might reason, in his own terms, this is the boost the market needs.
The impact will be not just on the annuities industry but on the financial assets they previously bought to fund the steady and risk free income stream needed to fund them – principally gilts.
Now the evidence is coming in as to what that buy to let boost might be. It is not good news to anyone concerned about financial stability.
Pensions & Investments specialist website IntrodcerToday
One in three people heading for retirement are considering purchasing a buy-to-let property, according to a recent survey by Platinum Property Partners.
Now a property solicitor has predicted a post-pension reform “feelgood fortnight”, as older savers rush to become amateur landlords.
John Nattrass of law firm McHale and Co said property prices, interest rates and new pension drawdown rules all point to significantly increased buy-to-let purchases in the spring.
The improving economy will have an even bigger impact, he said. “Buy-to-let is already growing strongly as economic feelgood starts to ease its way into the regions, but the combination of low interest rates and more freedom in terms of what people can do with their pension pots from April is likely to drive even more deals.”
But rising house prices may encourage buyers to move sooner rather than later. “April 6 is Easter Monday, smack in the middle of one of the busiest house-hunting periods of the year, and, for some people, pension freedom could be like a winning lottery ticket.”
Nattrass expects the burst of activity to last for a fortnight, because the run-up to the general election will soon put doubts in buyers’ minds. “Some people may wonder if there might be factors stacking against them with a new government, such as interest rate changes, or legislation aimed at either pushing or dampening growth.”
Solicitor Tim Wixted, managing partner at NeglectAssist, has warned it could all end in tears.
Its research has shown that 80,000 older people will use their new-found freedoms to invest in buy-to-let every year.
But Wixted said pensions reform is a mis-selling disaster in the making. “If the pension reform unleashes this pent-up appetite for being a buy-to-let landlord, we will likely see a boom and ultimately bust.
“With over 80,000 new retirees looking to invest in buy-to-let each year each year, inexperienced landlords will encounter low returns and unexpected problems.
“Many will make losses that they won’t be able to recoup, causing long-term damage to their retirement income.”
Rising housing capital values from increased buy to let demand is likley to be taken by retirees as a false signal of increased fundamentals, whilst if the rise housing investment will eventually feed through into greater completions depressing rental yields leading to an eventual popping of a real estate bubble, though this may take 3-4 years. At precisely the time when a falling demand for gilts will require either increased yields or a new batch of QE to mop up gilts at low interest – which will in turn fund an asset boom.
I suspect though that headlines around Easter of ‘feelgood fortnight’ will prompt many warnings in the media that this is an artificial pre-election house price boom and dire warnings amongst financial commentators not to bet their entire pensions on high risk investments. This could produce a political backlash and a swift market correction. Nothing pops a bubble quicker that fear of losing your nestegg.
So watch this space for TV pictures of people in their early 60s queuing up outside estate agents waving cheques.
There was a reason why pensioners had to buy annuities, to ensure stability and ensure pensioners had a steady and safe income that would otherwise have to be funded from general taxation. The cost of a grey boom and bust wont just be to house prices and banks this time but to state finances of a bail out to greedy and foolish buy to let baby boomers, now left penniless after having to make distress sales on their property purchases.