From April 2015, all restrictions on access to your personal pension pot will be removed. So long as you are fifty five you will be able to access the entire fund, with no restrictions on what you do with it. There will be no need to buy an annuity and a quarter of the fund will be tax free. However, the remaining 75% of the fund will be added to your income and taxed in the normal way.
These new rules could have a significant impact on markets generally. Already, some life companies who do a significant amount of business converting your pension fund into an annuity, have seen, in some cases, their share prices fall by up to 50%, as in theory, they may no longer have a market. Also, looking forward to 2015, when the pension can become totally liquid, if there is a rush to encash assets, it will have a negative impact on stock markets with perhaps a high level of redemptions in a very short space of time. Although there could be some winners, if this happens, with the potential for the automobile and holiday industry to benefit.
If, as expected, most pensioners will act responsibly and not blow their pension funds on high value items, what will they do with the cash windfall that they now have with annuity options for many looking poor value? In most cases, I expect people to draw the 25% lump sum and then keep the rest of the money invested and taking gradual income. This gradual income used to be capped by the government, in an attempt to ensure that the fund does not run out before you die. This option was available as an alternative to buying an annuity, before the change in the budget, and is known as drawdown, but the difference now is that there are now no restraints on the amount of income you can take. This situation leads me to think of possible ways to benefit from the new pension regime by linking it to buy to let. I think that there could be a particular benefit here for second earners in the family, or people who are going to only have the state pension when they retire. For example, provided you could raise a deposit on a buy to let property costing £80,000 and borrow say, £60,000 on an interest only basis at 4% per annum, you would have payments of £2,400 per annum. Then, for example, the rent after expenses was £4,800 per year, you then could invest the remainder, after paying tax on the profits, into a pension and gain tax relief. Once you retire, you could draw the tax free lump sum from the pension and drawdown the rest of the pension in the most tax efficient way possible, to repay the loan. This drawdown could take some years, but with the personal allowances set to be £10,500 for people retiring now and with a state pension of perhaps £7,500 per annum, there is scope in the future for making significant tax free withdrawals from the pension. Then, when this process is complete, you will receive the property rental income of say £4,800 per annum in today’s money, on top of that state pension, with most of this being tax free, with the overall arrangement being very tax efficient. The drawback with this scheme is that it is a long term plan, that could take twenty years plus to execute. Also the idea is not guaranteed to work, with the potential for lots of uncertainty along the way with regard to changes in the legislation, investment growth and investment rates.
But, for people who reach age 55 with existing pension pots of say £80,000, they could draw the £20,000 tax free lump sum they are entitled to, as a deposit on a buy to let and then borrow £60,000 on a buy to let mortgage, on an interest only basis. Once they have done this, they could gradually drawdown their pension plan as tax efficiently as possible, with any shortfall at the end being made up by the rent. So although they will have no pension fund left at the end of the exercise, they will have a lifetime income from the rent.
Overall, this new initiative from the government to make pensions totally flexible is good news, with opportunities for linking pensions to buy to let mortgages increasing the potential for growth in the property market. However, although all these measures are welcome, I would advise people to take independent financial advice before embarking on any of the courses of action described above, as they carry a significant amount of risk and commitment and will not be right for everyone.
Kieron Bassett Financial Services has two Independent Financial Advisers who specialise in mortgages, general insurance and investment advice. Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or visit www.kieronbassett.com.
Kieron Bassett DipPFS
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