One in three baby girls born today will live to 90, according to figures released earlier this month. With life expectancy rising, many people will be wondering whether their savings are sufficient to see them comfortably into old age.
Those who feel their cash would be more safely invested in property now have more options: since April, savers have been permitted to access their pension funds from the age of 55, without being taxed at the previous 55% rate for the whole amount.
Around 16% of those eligible to take advantage of the new freedoms will invest the money in property, according to Hargreaves Lansdown research, and it will be no surprise if some of them turn to auctions for the chance to find an affordable, long-term investment,
or a home for their offspring.
Hargreaves Lansdown auction finance director Scott Hendry does not need to look far for evidence that this is happening: his mother took the “independent decision” to spend her drawn-down funds at auction.
A retired teacher, she “felt she required more income to survive, and identified that she could do that by getting a couple of houses”, Hendry says. She bought one of these at auction, and one on the open market.
Since the pensions changes took effect this spring, Hendry has been fielding inquiries from others in a similar position to his mother, thanks partly to changing perceptions about the auction sector – particularly among Homes Under the Hammer viewers. No longer is the auction room seen as the preserve of the “middle-aged gent wearing a brown leather jacket”, he says.
In the two months from 6 April, 60,000 people took more than £1bn out of pension funds as a result of the new freedoms, chancellor George Osborne told the House of Commons in June. Without interrogating every buyer as to the source of their income, it is difficult for auction houses to know with certainty how much of this money is being put towards auction lots.
Demographic change
But Auction House London director and auctioneer Andrew Binstock senses a demographic change is under way, fuelled partly by the reforms. “There are a lot of cash-rich people of a certain age who are coming to auctions because of the facilities now available to them,” he says. “People see property as their primary source of investment, certainly in the long term.”
Allsop’s summer report, published earlier this month, revealed that the auction house had seen a “sharp rise in cash buyers”, with 69% relying on cash reserves in May, up from 65% in March, a change that was “possibly partly due to recent pension reforms”, it said.
But the impact of the pension reforms should not be overstated. Savills research estimates that around 1% of defined contribution pension wealth held by people aged 55-64 could end up as an additional investment in the housing market each year. This equates to £1.2bn and around 10,000 transactions a year, but just 0.5% of recent market turnover.
Savills director of national auctions, Chris Coleman-Smith, says that at these levels, the effect on house prices nationally will probably be limited, but there is likely to be pressure in lower-value markets. Binstock also thinks there will be an impact on pricing, particularly in the buy-to-let market, which is seen as the most obvious property channel through which savers will choose to invest their money. It offers both capital growth and – if all goes to plan – a steady income.
Auctions are an excellent hunting ground for the kind of buy-to-let property likely to be desired by those looking to invest their pension funds, says Coleman-Smith. “At auction, pension investors are usually looking for lots that offer a good rental yield,” he says.
“Typically, these are properties at
the lower end of the housing market –
as rents increase, the number of potential tenants narrows and yields begin to fall away.”
Ex-council properties – bread and butter to many auction houses – are often popular because they achieve rental yields of 8% to 11%, which is
above the average of 5% to 7%, says Coleman-Smith.
However, the allure of buy-to-let investments may fade with the announcement in the government’s summer Budget that mortgage interest tax relief will be phased out over four years from April 2017.
Gary Murphy, partner in Allsop’s residential auctions team, feels that this, added to predicted interest rate rises, will weaken the draw of buy-to-let purchasing for some buyers. He is unaware of pensioners attending auctions in droves since the changes took effect: there are still certain tax advantages to keeping funds tied up in a pension, he points out.
If the sheen has gone from buy to let, could commercial property be a better option for those with newly released pension funds? Strettons director Philip Waterfield thinks so. “The obvious [option] is buy to let, but actually you could tap into the commercial market,” he says. “If it’s well-let, for 15 years you have yourself a nice little investment.”
A 55-year-old could buy a property on a long lease, let it to a reliable tenant – such as a bookmaker – and by their 70th birthday decide to either re-let it or sell it, depending on their financial position, he suggests.
Waterfield categorises those with accessible pension pots into two distinct classes. There are risk-averse “institutionalised” investors like his father, with his steady Rolls-Royce pension, who would be reluctant to draw down the funds. Others, who are more “entrepreneurial,” may have been stung by supposedly safe investments turning sour and want to play a more active role in ensuring their long-term financial health. These investors may enjoy the “adrenalin” of the “quite British and sexy” auction room, he says.
Or they may be looking for a specific purchase – such as the Scandinavian coffee shop Waterfield’s Danish wife has always hankered after, which may simply be unavailable via private treaty.
Inexperienced buyers
What are auction houses’ responsibilities towards a possible influx of inexperienced buyers ready to spend their life savings? Few clients acquire valuations before buying residential properties, and the tendency of first-time auction-goers to admit they have not checked legal packs for properties they are considering buying is “terrifying”, says Hendry.
Auction houses should be guiding less-experienced bidders through the process, he says. For example, even if they are aware of the difficulty, under the “six-month rule”, of being able to refinance within six months of buying a property, they should also check when the previous owner bought it, he advises.
Binstock agrees that auction houses have a “duty” to provide guidance to the best of their ability, but says they must go further in making newcomers feel welcome. Although the image of auctions has changed, it is still commonly viewed as an “underground” world, he says, accounting for just 2% – at most – of the property market.
A “new wave” of auctioneers, reaching out to clients using modern marketing tools, needs to replace the “older generation”, he argues, to widen the appeal of property auctions and to allow the sector to capitalise on a new potential customer base.
What do pension changes mean?
• Individuals aged 55 and over can withdraw their pension funds in full or in smaller sums, without facing an automatic 55% tax bill, as before
• Withdrawals will be treated as income for that year, for tax purposes
• Up to 25% of the pension pot will be tax-free, as before
• Those with a defined benefit scheme can transfer to a defined contribution plan if they choose, to take advantage of the changes. This does not apply to unfunded public sector schemes
• Unused pensions can be inherited as a tax-free lump sum from those who die before the age of 75
Changes to pension rules since 6 April 2015
Who is affected?
• Those aged 55 with savings in a defined contribution pension scheme, whether they are working or retired
• Those with relatively large pension pots, who will be able to avoid paying the top rate of income tax on the money by drawing down the funds in smaller instalments over several years
