Under the old rules pensioners were entitled to take one 25% tax-free lump sum withdrawal but were generally encouraged to purchase an annuity with the rest of their pot. The pension freedoms will allow pensioners to take out withdrawals when they like, benefitting from a 25% tax-free portion on each withdrawal with the remaining element of the drawdown taxed as income.

Scottish Friendly director Neil Lovatt said that property was the most obvious investment for people drawing out their pension pot. But he warned the influx of cash-rich older borrowers to the market would push up prices and draw lenders’ focus away from serving first-time buyers favouring those with large deposits instead.

This week we’ve asked our panel of experts to consider if the predicted wave of cash-rich pensioners poses any real threat to lenders’ appetites to serve the needs of the fledging buyers.

Bernard Clarke, Council of Mortgage Lenders, says improved funding conditions means lenders do not have to choose between borrower types.

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Charles Haresnape, chairman of the Intermediary Mortgage Lenders Association, says the political spotlight on first-time buyers will serve to keep them in the forefront of lenders’ minds.

Richard Adams, managing director of Stonebridge Group, warns against believing the hype surrounding predictions of a swathe of silver landlords and lenders’ reactions to serving their needs.

 

Bernard Clarke works at the Council of Mortgage Lenders

The question implies lenders are under pressure to choose between different types of customer, but is that really true?

Funding availability has now recovered and is as good as it has ever been (certainly post-crunch) and so does not appear to force a choice between one type of customer and another. Yes, arrears rates on owner-occupied mortgages are around twice what they are in the buy-to-let sector – implying greater risk and higher capital costs. But arrears are low overall (in both sectors), and so may not be a determining factor.

If there are supply constraints, they are in the property market, not mortgage funding. It is sometimes argued that buy-to-let investors displace first-time buyers, but activity by both grew strongly last year. Typically, buy-to-let investors may often be in a stronger equity position. But we have seen a welcome decline in the number of first-time buyers needing help with their deposits, and this group are now being supported in significant numbers by Help to Buy schemes.

The effects of pension liberalisation will probably be shaped by a set of complex and inter-related factors. Many pension pots are simply too small to fund buy-to-let portfolios, although larger ones could have a significant impact if they were all channelled into property. But there are complicating factors, including tax treatment, returns from property investment and its alternatives, attitudes to risk, advice – and consumer perceptions of all of this.

So, will unleashing the silver pound trigger a surge in property investment? We will have to wait and see but, as we saw with the MMR, it may be difficult to judge the effects in the short term.

Charles Haresnape is chairman of the Intermediary Mortgage Lenders Association 

Pension Freedom Day on 6th April will see over-55s allowed to access their defined contribution savings as cash, with the first 25% tax-free. It’s the most dramatic change to pensions in a generation.

Commentators are speculating that the new freedom will prompt a rush to buy-to-let by older people who have endured low returns on savings for six years and are eager to source alternative investments. Bricks and mortar are attractive but will we see a buy-to-let boom and more first-time buyers priced out of the market? I don’t think so.

Many retirees will wish to stay in investments that they know and trust. Many won’t want the hassle associated with buy to let: maintaining properties, finding good tenants, coping with void periods or difficult tenants.

Those who already have buy-to-let portfolios may take the opportunity to expand but with an average pension pot of under £30,000, only the more wealthy will be able to afford to. People retiring have spent a long time building up their pension pots and most will be cautious and painstaking in choosing the best way forward. And they should all seek advice first of course.

For perspective, it’s worth remembering lenders provided 311,500 loans to first-time buyers last year, more than 2.5 times the 117,500 buy-to-let loans advanced. The new pension freedoms won’t dramatically change the outlook for first-time buyers, whose situation is also in the political spotlight and is sure to bring further support initiatives from government.

Richard Adams is managing director of Stonebridge Group

Quite frankly, I believe the ‘hype’ around the newly retired dropping their pension pots into the property market en masse is overblown. I have read headlines recently along the lines that first-time buyers have one month left in order to get on the housing ladder before the new pension-laden ‘baby boomers’ enter the market and gazump them into oblivion.

I think this is absolute nonsense for any number of reasons. Firstly, the average pension pot is around the £30k mark – any pensioner drawing down all of this, with the resultant tax to pay, and dropping the lot into property is foolish in the extreme. Of course there will be a number of pensioners who have very sizeable pots who may look at property as part of their plans to secure income in their retirement, but I don’t believe this will be on anything like a large enough scale to drive major changes in the market.

Lenders, as always, will look at a variety of product options that make the best use of their funds and deliver the margin they need. Buy-to-let lending is no different and, as far as I’m aware, existing buy-to-let lenders are not envisaging a massive surge in new ‘silver landlords’ who have suddenly seen the massive opportunity that exists in the sector.

I suspect most retirees will be relatively cautious with their pension pots – after all they’ve spent their whole lifetimes saving in them and they also need to ensure that they are able to last and fund their lifestyles potentially for many years to come. Pensioners tend to like certainty when it comes to their monthly income and therefore a buy-to-let investment may be seen as far too risky for the majority as compared to an investment like an annuity which delivers a fixed amount they can rely on.