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Don’T Feed The Vis’ “Prices Set To Soar” Frenzy

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Following the announced pension changes a lot of people (including on this forum) seem to be falling for the VI mantra that house prices are set to soar yet higher as hordes of people convert their pension pots into BTL. Unless I’m missing something obvious, though, I just don’t get the argument – why would even the most bullish 50- or 60-something take an immediate tax hit just to transfer from one type of investment to another?

Take the example of someone with a £240k pension pot (much higher than the average) and no mortgage or other debts they want to pay off. £60k will be able to be taken as cash, tax free, but that’s no different from under the old rules – so the difference surely relates to the remaining £180k. The suggestion seems to be that loads of people will prefer taking an immediate big tax hit in order to invest in BTL rather than leaving the money invested in a range of funds which could (if they chose) offer similar levels of potential income as well as potential for capital gains – or risk of losses – as domestic property.

I reckon the tax on the £180k would be nearly 30%, assuming the only other taxable income in the year of drawdown was £10k (eg state pension), giving taxable income in that year of £190k. After personal allowance of about £10k this would leave £180k to be taxed as follows, based on 2014/15 tax rates:

£32,000 @ 20% = £6,400

£118,000 @ 40% = £47,200

£30,000 @ 45% = £13,500

The total tax bill of £67,100 would leave just £173k of the original £240k to invest. With gross yields - in the south east, anyway - currently around only 4%, before tax, where’s the attraction – particularly given the inflexibility of owning property compared with pension funds, from which levels of drawings will easily be able to be ramped up or down according to needs, desires and tax circumstances from year to year?

As it’s often pointed out, it’s leverage that attracts people to BTL – and part of that’s because of the mentality of people prepared to borrow cheap money either in the belief that it’ll always stay cheap, or that someone else will bail them out if it goes wrong. Even if there is to be a new market for pensioner mortgages – which I doubt – I still don’t see what’s changed, given the existing 25% tax free drawdown to fund a deposit.

What I think is really happening is that the VIs are using these pension changes into panicking more people into buying now “before it’s too late” – and, as it’s often said on here, this is reminiscent of the sort of scaremongering that was rife before 2007.

Sentiment is so important in driving house prices – up or down - and I’ve sensed a real change in attitudes over the past year, as even lots of boomers have come around to the idea that falls would be good for the sake of their children. Meanwhile the various schemes by TPTB to keep the ponzi going might tempt us into thinking the game’s been lost, but – aside from big unknowns (China, Russia, inflation, deflation, currency crises, further government meddling, etc) – there are several known factors that still give me hope that we might just be near the top:

1) The MMR - albeit watered down, this will surely have some effect on reducing the availability of cheap credit

2) Withdrawal of FLS for domestic mortgages – it’s taking time to feed into rates, but remember what happened when it was introduced

3) QE tapering and expectations of base rate rises – even with the fiddled forward guidance, media speculation is they’ll go up sooner than expected.

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Good post, and in line with my view. They'd be nuts to buy a BTL when seeking a reliable income stream. Won't stop some though, and if someone wants to provide a place for rent at sub-4% gross yield, while assuming obligations for the maintenance of the building and white goods, I'll happily consider providing them with that sort of return.

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The question also is is how many people are there with these sizeable pension pots which would be sufficient to fund lots of buy to let properties.

The average defined contribution pension pot is only £30,000 - which is a little worrying given that this is supposed to support people for 25 years+. And this is a generation who have had it all - how will those on zero hours contracts facing high housing costs/student debts be able to save anything more than a pittance for their retirement.

It does make you wonder how we are going to fund our welfare state in the future - not that we can actually fund it now!

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Sensible tax planning is really required to unlock the funds to make it tax efficient. Churning a 100k pot into four smaller pots and then taking one each year might be one way forward.

I gather some providers may allow partial withdrawal of a fund each year. However, I believe that this route disqualifies entirely the 25%tax free lump sum. For someone who retires at 55 and then uses the personal allowance of £10,500 each year that might not matter.

But yes releasing a large fund all at once is very tax inefficient.

Edited by crashmonitor

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The question also is is how many people are there with these sizeable pension pots which would be sufficient to fund lots of buy to let properties.

The average defined contribution pension pot is only £30,000 - which is a little worrying given that this is supposed to support people for 25 years+. And this is a generation who have had it all - how will those on zero hours contracts facing high housing costs/student debts be able to save anything more than a pittance for their retirement.

It does make you wonder how we are going to fund our welfare state in the future - not that we can actually fund it now!

I don't buy the fact that most people with a 30k fund need this to last 25-30 years.

I have a fund very close to that (£27,000), but in the perspective of other savings it is a fairly insignificant mistake I made years ago (which with the new flexibility may not be such a bad thing after all).

If I decide to blow it, It will make absolutely no difference to the help the state will give me, I will get the universal state pension come what may. Even council tax benefit is a no goer because of partner's final salary scheme and aforementioned savings.

Edited by crashmonitor

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If (and I say 'if') the plan is to add another log to keep the bubble going, won't they just create some btl/pension vehicle - a sort-of self-generated annuity?

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If (and I say 'if') the plan is to add another log to keep the bubble going, won't they just create some btl/pension vehicle - a sort-of self-generated annuity?

I wonder if eg Legal&General might reconsider their decsion to withdraw from the possibility of funding and building residential housing for renting out. You could see a market for people who want to invest pension funds in housing but yields are too low, too risky to have just one tenant providing the income, what about a closed fund/bond or suchlike whereby returns are averaged from many tenants/sites.

Could be a decent means of building higher quality rental property on longer tenancies without having to deal with dickhead agents etc. There would be some downsides I'm sure but a large insurer type organisation could ream the opposition letting agents etc. I think there is an opportunity here and if done well could result in more, better housing.

Edited by The Knimbies who say no

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And once interest rates rise to a more normal level, annuity rates will improve.

Considering increasing life expectancy, annuities would become more attractive.

There are risks that annuities will overall diminish in payouts if the industry has less to spread around (its like insurance, those who live shorter lives balance out those who live longer, so with fewer people in the annuity 'pot' the risk to the annuity provider increases reducing overall payouts).

Even so I don't think this is the end of annuities, it just might mean the providers have to work harder and there is scope for better competition/shopping around.

Also, at retirement, how many people want the hassle which comes with running a BTL? If its fully managed the yield is lower still.

I think this change is probably a good thing provided people get good advice. For many people that could be an issue as most people don't know the first thing about investing, they need to be protected from the charlatans and snake oil merchants

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Maybe 55 is just missing the right age profile in any case. According to this the average BTLer is 48. Certainly the idea of getting another money pit liability to add to the one you live in might dwindle with age. I'm the right age, but actually the idea of owning two houses would be my worst nightmare.

http://www.telegraph.co.uk/property/property-club/10243085/investing-buy-to-let.html

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Against all the rational arguments as to why BTL is not the way to go we have to factor in the totally irrational almost messianic faith that property is always going to rise in value- so one could see a strategy in which a working 55 year old will cash out enough to fund a deposit on a BTL with a view to selling on when they get older.

Also in a world where almost everyone connected to financial services seems to be a crook of some sort owning something 'real' in the form of house might seem a lot more attractive than piece of paper drafted by fraudsters.

so I reckon there will be some impact on the housing market from this- especially at the shallower end where the BTL sharks cruise.

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There is another big issue here - if, like me, you doubt strongly that pensions will exist to pay out when you retire, it would be tempting when you hit 55 to take it out, take the tax hit, and see that as the cost of having something out the system before it collapses....

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I wonder if eg Legal&General might reconsider their decsion to withdraw from the possibility of funding and building residential housing for renting out. You could see a market for people who want to invest pension funds in housing but yields are too low, too risky to have just one tenant providing the income, what about a closed fund/bond or suchlike whereby returns are averaged from many tenants/sites.

Could be a decent means of building higher quality rental property on longer tenancies without having to deal with dickhead agents etc. There would be some downsides I'm sure but a large insurer type organisation could ream the opposition letting agents etc. I think there is an opportunity here and if done well could result in more, better housing.

I was wondering that too. Isn't that how the majority of European rentals are run? L & G said they pulled out because of H2B - am I right in that? May also head us in the direction of longer more secure tenancies too - no more mini Hitler letting agents either.

Wherebee I share your concern that pensions will stop paying out in the future - what time span were you thinking before they stop or become so low that they are not even worth counting?

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Good second post but why wait so long. We could do with more thinkers here on HPC :)

Thank you, I'll make the effort to post a bit more! This one was prompted by some of the knee-jerk reactions I've read.

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I think the OP is first class. The danger is that this analysis gives the Wurthers generation too much credit. This is the lot that have seen property sore (sic), want something other than thickness to "pass on", have experienced QE (but don't realise), aspire to owning property, and have seen a man on the magic lantern suggest it. I fear it will end in their tears.

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I'm a trustee of a company pension scheme, based on the questions and comments I hear from members of that scheme I've long given up any expectation of rational behaviour when it comes to pensions.

The problem stems from three basic facts,

1. Pensions are complicated and very few people are prepared to invest the time and effort to understand them.

2. Many people have champagne aspirations for their retirement, but only have a lager budget to fund it.

3. Many people detest their jobs and their commute, as they get older they become increasingly desperate to retire.

I've often been in the position of explaining the hard truth about the retirement options that face individuals, and I honestly think it must be easier to tell someone that they have cancer than to spell out that achieving the retirement they want means either living very frugally for many, many years; or putting off retirement until they're well into their seventies.

The most common reaction is simply to stop their ears and pretend they haven't heard me, the options I give them are all so uniformly horrible that they just block it all out.

So it's with that perspective on the world of pensions that I considered the news about the pension changes in the budget.

Consequently I'm convinced that there will be many thousands of people each year who will now withdraw their pension pots in order to buy into BTL. They won't be doing it because it makes sense, it doesn't make sense, to play out would require an entirely unrealistic set of events. But they'll do it because they can fudge some crazy numbers on the back of an envelope and persuade themselves that here's a route out of their miserable careers.

The thing about an annuity is that it comes down to a single number in black and white, so people are confronted with a simple scenario, if I retire at 55, or 60, or 65 then I'll have £7,000 a year to live on...or whatever the number is. And they can clearly imagine what living on that amount would look like and shudder. But the budget changes mean they can now construct some insanely optimistic BTL forecast based on zero voids, regular rent increases, massive capital appreciation, etc etc.

I haven't the slightest doubt that a fair proportion will now go down that irresponsibly optimistic road.

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the budget changes mean they can now construct some insanely optimistic BTL forecast based on zero voids, regular rent increases, massive capital appreciation, etc etc.

I haven't the slightest doubt that a fair proportion will now go down that irresponsibly optimistic road.

Good. They will pay the price for trying to get more out of the system than they were willing to pay in, and assets will pass from weak hands to strong ones.

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Good. They will pay the price for trying to get more out of the system than they were willing to pay in, and assets will pass from weak hands to strong ones.

There's a lot of people who might think that people losing out on their investment/buying decisions, where values at risk of falling substantially, would be "over-rewarding" the remaining savers who decided against being lured in to over-paying. You get it on here time and time again, including from people who've burnt through savings to protect themselves from inflation. And for prices to rise, buyers and sellers would have to transact at even higher prices than today's crazy bubble prices anyway. Let them do so; there's already pressures on rents and evermore reasons to continue renting rather than buying.

And no shortage of victim-excuses for buyers who bought and paid ever higher stupid prices. No stomach for a crash. Prepared to offer excuses to block opportunity for younger people and savers. Yes; advertising influences a lot of people to just make decisions, including banks selling debt. What a massive revelation. It's a market, you have to look beyond advertising, and not offer ways out for those who decided to do a minutes worth of thinking before paying x2 x3 what others prepared to pay.

It's why Millard can boast how she's now an international property investor - or something like that - and many others like her just the same - absolutely fully convinced how property is everything. Too many people not fit to polish her shoes, given their excuses for debtors, offering no challenge to VI policies (QE, 0.5%, FLS, mortgage rescue, HTB). New BTLers altogether cleverly using banks' money continuing the same old same old bubble-boom property-is-everything.

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Consequently I'm convinced that there will be many thousands of people each year who will now withdraw their pension pots in order to buy into BTL. They won't be doing it because it makes sense, it doesn't make sense, to play out would require an entirely unrealistic set of events. But they'll do it because they can fudge some crazy numbers on the back of an envelope and persuade themselves that here's a route out of their miserable careers.

This is what I fear- it may not be rational but it will feel like a better option to many people- and they will get something tangible for their money- which might itself be appealing in a world where paper promises of future gains look increasingly vaporous.

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I was wondering that too. Isn't that how the majority of European rentals are run? L & G said they pulled out because of H2B - am I right in that? May also head us in the direction of longer more secure tenancies too - no more mini Hitler letting agents either.

Wherebee I share your concern that pensions will stop paying out in the future - what time span were you thinking before they stop or become so low that they are not even worth counting?

I'm not entirely sure about the European situation on rentals, but in the UK Aviva, Pru and L&G were all making noises recently(within the last 12 months) about 'build to rent', and in L&G's case anyway they were pretty clear that they viewed an intergenerational injustice on housing as a prime motivation.

I guess these insurers stand to lose out quite a bit from the pension changes, and will need to replace it somehow. L&G bought a property portfolio in the last week or so(and the sellers will use the proceeds to build more), but this is of course not the same as funding new builds directly. Seems likely they must be considering it but I've no special knowledge of the sector so could be well wide of the mark.

http://www.legalandgeneralgroup.com/media-centre/press-releases/2014/legal__general_invests_225m_with_places_for_people_to_help_build_7000_new_homes.html

Edited by The Knimbies who say no

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Following the announced pension changes a lot of people (including on this forum) seem to be falling for the VI mantra that house prices are set to soar yet higher as hordes of people convert their pension pots into BTL. Unless I’m missing something obvious, though, I just don’t get the argument – why would even the most bullish 50- or 60-something take an immediate tax hit just to transfer from one type of investment to another?

Take the example of someone with a £240k pension pot (much higher than the average) and no mortgage or other debts they want to pay off. £60k will be able to be taken as cash, tax free, but that’s no different from under the old rules – so the difference surely relates to the remaining £180k. The suggestion seems to be that loads of people will prefer taking an immediate big tax hit in order to invest in BTL rather than leaving the money invested in a range of funds which could (if they chose) offer similar levels of potential income as well as potential for capital gains – or risk of losses – as domestic property.

I reckon the tax on the £180k would be nearly 30%, assuming the only other taxable income in the year of drawdown was £10k (eg state pension), giving taxable income in that year of £190k. After personal allowance of about £10k this would leave £180k to be taxed as follows, based on 2014/15 tax rates:

£32,000 @ 20% = £6,400

£118,000 @ 40% = £47,200

£30,000 @ 45% = £13,500

The total tax bill of £67,100 would leave just £173k of the original £240k to invest. With gross yields - in the south east, anyway - currently around only 4%, before tax, where’s the attraction – particularly given the inflexibility of owning property compared with pension funds, from which levels of drawings will easily be able to be ramped up or down according to needs, desires and tax circumstances from year to year?

As it’s often pointed out, it’s leverage that attracts people to BTL – and part of that’s because of the mentality of people prepared to borrow cheap money either in the belief that it’ll always stay cheap, or that someone else will bail them out if it goes wrong. Even if there is to be a new market for pensioner mortgages – which I doubt – I still don’t see what’s changed, given the existing 25% tax free drawdown to fund a deposit.

What I think is really happening is that the VIs are using these pension changes into panicking more people into buying now “before it’s too late” – and, as it’s often said on here, this is reminiscent of the sort of scaremongering that was rife before 2007.

Sentiment is so important in driving house prices – up or down - and I’ve sensed a real change in attitudes over the past year, as even lots of boomers have come around to the idea that falls would be good for the sake of their children. Meanwhile the various schemes by TPTB to keep the ponzi going might tempt us into thinking the game’s been lost, but – aside from big unknowns (China, Russia, inflation, deflation, currency crises, further government meddling, etc) – there are several known factors that still give me hope that we might just be near the top:

1) The MMR - albeit watered down, this will surely have some effect on reducing the availability of cheap credit

2) Withdrawal of FLS for domestic mortgages – it’s taking time to feed into rates, but remember what happened when it was introduced

3) QE tapering and expectations of base rate rises – even with the fiddled forward guidance, media speculation is they’ll go up sooner than expected.

Current rules don't say you have to take all the money out in 1 go, or buy an annuity.

In the example above the advice if the person wanted to get into BTL would be, take out the 25% lump sum immediately, then take the remaining 180k over 4 years or so @ a mixture of 0% and 20% tax rates (just take out enough each year to not reach the 40% threshold). Short enough time to be fairly happy to stagger the withdrawal to minimise the tax hit. With 90k or so available on day 1 (25% lump sum and year 1 withdrawal of 40k at around 15% tax) - easily enough to get into BTL if that's the route they wanted to go down.

Saying that, I agree that this won't lead to a tidal surge of BTL investment by the over 55's. Mainly because at that age most people will want to retire to as easy a life as possible. Most of those with an inclination to get into BTL are probably knee deep in it already.

Edited by martymcfly

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Saying that, I agree that this won't lead to a tidal surge of BTL investment by the over 55's. Mainly because at that age most people will want to retire to as easy a life as possible. Most of those with an inclination to get into BTL are probably knee deep in it already.

Let them buy into BTL in many areas which have topped out. See there returns now, and in the future. It's terrible now for buyers even with projected HPI growth. See their positions in the future with some hpc mixed in vs renters positions.

London is currently the most renter-friendly location in Britain. After seven years, a typical London renter would be £82,412 better off than a buyer with a 10% deposit of an equivalent property. It would take 18 years for a London buyer with a 10% deposit to begin to be financially better off compared to the equivalent renter. These calculations are based on a conservative estimate of 4% annual house price growth in the capital.

Bournemouth is the second most renter-friendly town in Britain. With average asking prices of £380,206 and average rents of £1,024 it would take twenty two years for a buyer with a 10% deposit to be better off compared to a renter in an equivalent property. After a seven-year period, a typical renter in Bournemouth would be £30,719 better off than a typical buyer with a 10% deposit.

Zoopla 11 February 2014

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I'm a trustee of a company pension scheme, based on the questions and comments I hear from members of that scheme I've long given up any expectation of rational behaviour when it comes to pensions.

The problem stems from three basic facts,

1. Pensions are complicated and very few people are prepared to invest the time and effort to understand them.

2. Many people have champagne aspirations for their retirement, but only have a lager budget to fund it.

3. Many people detest their jobs and their commute, as they get older they become increasingly desperate to retire.

I've often been in the position of explaining the hard truth about the retirement options that face individuals, and I honestly think it must be easier to tell someone that they have cancer than to spell out that achieving the retirement they want means either living very frugally for many, many years; or putting off retirement until they're well into their seventies.

The most common reaction is simply to stop their ears and pretend they haven't heard me, the options I give them are all so uniformly horrible that they just block it all out.

So it's with that perspective on the world of pensions that I considered the news about the pension changes in the budget.

Consequently I'm convinced that there will be many thousands of people each year who will now withdraw their pension pots in order to buy into BTL. They won't be doing it because it makes sense, it doesn't make sense, to play out would require an entirely unrealistic set of events. But they'll do it because they can fudge some crazy numbers on the back of an envelope and persuade themselves that here's a route out of their miserable careers.

The thing about an annuity is that it comes down to a single number in black and white, so people are confronted with a simple scenario, if I retire at 55, or 60, or 65 then I'll have £7,000 a year to live on...or whatever the number is. And they can clearly imagine what living on that amount would look like and shudder. But the budget changes mean they can now construct some insanely optimistic BTL forecast based on zero voids, regular rent increases, massive capital appreciation, etc etc.

I haven't the slightest doubt that a fair proportion will now go down that irresponsibly optimistic road.

I think you are spot on, many people clutched at the BTL idea as their only chance (barring a big lotto win) of escaping the horror of their commuting lives, many more may well try to do so in the future with released pension funds. However, as you say many only have funds for a "lager lifestyle" they won`t be able to prop the market for long, we are still in collapse mode, and the more people that screw themselves financially, the more distressed sales and less competition to buy going forward.

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Current rules don't say you have to take all the money out in 1 go, or buy an annuity.

In the example above the advice if the person wanted to get into BTL would be, take out the 25% lump sum immediately, then take the remaining 180k over 4 years or so @ a mixture of 0% and 20% tax rates (just take out enough each year to not reach the 40% threshold). Short enough time to be fairly happy to stagger the withdrawal to minimise the tax hit. With 90k or so available on day 1 (25% lump sum and year 1 withdrawal of 40k at around 15% tax) - easily enough to get into BTL if that's the route they wanted to go down.

Saying that, I agree that this won't lead to a tidal surge of BTL investment by the over 55's. Mainly because at that age most people will want to retire to as easy a life as possible. Most of those with an inclination to get into BTL are probably knee deep in it already.

And the other reason is that the tidal wave of credit given out to anything with a pulse, of any age, in the run up to 2007 masked how poor many people really are. I would take a punt and say that those with pensions worth hundreds of thousands just waiting to spunk on BTL are in the minority, for one because most have not built their pensions up to this extent, and secondly, smart money is not looking for a home in BTL?

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