Now that the dust a settled on the recent U.K.budget our colleague Charlotte Bland at Caxtons Chartered Surveyors runs her expert eye over George Osborne's pension reform and the investment opportunities that are now apparent in the property sector.
Chancellor of the Exchequer, George Osborne's 2014 budget saw what has been hailed as the most radical overhaul of the pensions system in nearly a century, and as a result will now give savers the opportunity to withdraw large lump sums from their pensions to reinvest as they see fit, potentially in higher yielding assets such as property.
Prior to the introduction of the changes, due to take effect from April 2015, individuals who have built up a lump sum in a defined contribution or money purchase pension have the option of either keeping their fund invested and receiving an income drawdown, or exchanging their savings for an annuity. There has been the option of making withdrawals of up to £18,000 but some believe very few have taken advantage of this due to the complex rules which surround it.
Closely linked to the return on annuities, the 15 year gilt yield currently stands at 3.22% and has seen increases over the last 6 months, although, some expect it to experience limited growth going forward.
However, the pension changes mean that savers will no longer be pushed into buying annuities. They will instead benefit from the flexibility of being able to access the entirety of their pension at any time after the age of 55, although withdrawn funds will be subject to income tax at marginal rates on 75% of the total amount whilst 25% remains tax-free.
One of the alternative options for those who do decide to withdraw a lump sum, may be to provide cash to invest in property. Whilst many may automatically look to the residential market for buy-to-let investments, as a relatively secure and straight forward way to generate an income from their savings, it may pay to consider commercial property investments too.
Whilst residential properties do pose a relatively secure and straight forward investment solution, historically the returns produced by residential property are considerably lower than their commercial counterparts. And although rents have fared well during recent years, over the last month they have remained flat across the UK. This, coupled with soaring house prices - the Office for National Statistics reported a 13.2% and 7.1% increase for London the South East respectively just in the last year - the income yield on buy-to-lets is starting to be squeezed.
The commercial property market is starting to look more and more positive. With an improvement in both occupier and investment market conditions consistent with the more upbeat macro economic outlook and, in their latest UK Commercial Property Market Update, the RICS is backing this trend to continue over the course of 2014, commercial property could prove to be a far more profitable investment for pension savings.
The Investment Property Databank Ltd (IPD) All Property Capital Value Index also shows commercial property asset prices have risen by 4.3% in yearly terms although still remain 30% lower than 2007 values, making commercial property a potentially more affordable option than previously, but still offering investors good prospects of future growth.
Commercial mortgages are still available at competitive rates, meaning those who have a lump sum from their pension could use it as a deposit to finance their investment and bolster the amount they could earn from it.
Furthermore occupier demand is now at record levels and is placing significant upward pressure on rents. The RICS Rental Expectations Series has become increasingly positive in each subsequent quarter since mid-2013 implying that investors are likely to experience strong income returns from their assets.
Overall, along with other asset classes, residential property investment offers an attractive alternative to the previously oppressive annuities schemes. However, savers would be wise to consider the potential of commercial property investment too. With strong forecasts for both rental and capital growth, and opportunities still proving more affordable than they once were, it could be the ideal opportunity to make your pension work harder than it ever has.
Charlotte Bland - Caxtons Chartered Surveyors
For pension advice, please speak to an Independant Financial Adviser.