Personal PensionMar 30 2016

Property winning race for post-freedoms pension pots

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Property winning race for post-freedoms pension pots

Property is emerging as the most popular destination for cash withdrawn from pensions in the first 12 months since the at-retirement reforms.

Separate reports published this week, in the run up to the first anniversary of the 6 April pension freedoms, have showed that of the money taken out and reinvested by those aged over 55, most has gone into property investments.

Online investment site True Potential Investor carried out a study of almost 4,000 people over the period from April 2015 to March 2016, finding that a third had reinvested their tax-free cash lump sums, compared to just over a quarter who used it to pay off debts and just under a quarter who simply spent it.

What have you done with the majority of money accessed under pension freedoms?
Property (purchase or improvements)42%
Reinvested into an Isa19%
Reinvested into a pension16%
Invested overseas13%
Invested in a business10%

Earlier this week the Association of British Insurers revealed that a total of almost £6bn has been taken out of people’s pots since the rules were changed, meaning over £800m could have been diverted into property from pensions.

However, True Potential’s research demonstrated that the overall take-up of the freedoms has been relatively small so far, with just 10 per cent of eligible savers making withdrawals.

True Potential Investor’s managing partner David Harrison said this could be down to the cost of advice on what to do with one’s pension being a “major obstacle” for many.

“The volume of advice and evidence gathering required can mean someone with a pension pot of £20,000 may have to pay well over £1,000 just for the advice. That is undoubtedly off-putting and unnecessary.”

As FTAdviser sister title Money Management pointed out earlier this month, property as an asset class has outperformed equities and fixed income for decades, as booming prices have offered growth over the past few years - data from LSL Property Services showed residential prices increasing at 5.5 per cent annually, compared to 2.1 per cent salary growth.

The pension to property trend was also backed up by research from Fidelity International, which commissioned a survey of 510 UK adults - who have retired of accessed their pension since last April - during February.

It also found that the most popular choice is reinvestment, at 47 per cent of respondents - with a third of those putting it into cash accounts, followed by 13 per cent who have or plan to put the money into property.

Just under half of those taking cash are staying within the boundaries of their tax free cash lump sum, with 19 per cent the average proportion being withdrawn. Yet 17 per cent have taken or plan to take more than 25 per cent and, as a consequence, may incur an extra tax bill.

Richard Parkin, head of retirement at Fidelity International, commented that while cash is great for that rainy day fund, it may not make sense over the longer term. “Likewise, property can be very rewarding, but recent government tax changes will have taken some of the shine off these investments.”

Douglas Baillie, director of Perth-based financial advisers Douglas Baillie, also warned that moving money from the relative safety of a pension into property is “very risky” because rental income depends on the quality of the tenant, maintenance costs can be high and it is notoriously illiquid.

peter.walker@ft.com