Pensioners seeking to liberate cash from their pension to invest in buy-to-let property could be hit by falling yields, after the new chief investment officer in Lloyds Bank’s private client wealth division warned the sector could be set for more modest returns.
Markus Stadlmann, who was appointed to head up strategic investments at the private client unit in October last year, told FTAdviser that slowing growth in property price inflation would likely persist and that the residential market “probably won’t deliver the yields it has in the past”.
He sounded a note of extreme caution on the option of investing pension money in this way, although he acknowledged the draw for many in the baby boomer generation for tangible property investments.
His comments should sound a warning to the swaths of would-be retirees who will be given unfettered access to their pensions in April and are planning to eschew traditional retirement income options to invest in bricks and mortar.
Strong demand for buy-to-let from the first wave of pension freedom beneficiaries was confirmed this week by both Rightmove, which reported a surge in such enquiries, and Mark Harris, chief executive of mortgage broker SPF Private Clients.
Commentators have suggested the obstacle of rising house prices will be circumvented by retirees using pension cash as a deposit on a mortgage, which they will take out into retirement as buy-to-let is unencumbered by MMR age restrictions.
Advisers have generally reacted dismissively to the suggestion that people would seek to withdraw from their pot to invest in property, citing huge tax liabilities including potentially 40 to 45 per cent tax on the withdrawal and all subsequent income that year, along with stamp duty.
Other taxes cited by advisers in a debate on FTAdviser’s comments board included tax on rental income and capital gains tax, along with the costs and headaches associated with rental voids or upkeep of the property.
Some IFAs have even said the idea is so reckless they would simply walk away from any client insisting on this as a course of action. But a few have said the idea should not be rejected and that yields could stack up for some clients.
Writing in FTAdviser sister title Money Management last month, Bob Campion of Charles Stanley Pan Asset Capital Management estimated yields of 8 per cent a year unlet, 17 per cent a year let, on an standard house worth around £300,000.
This, however, did not include the initial withdrawal taxes. An analysis produced by Hargreaves Lansdown last year and published the Daily Mail suggested that once these taxes were factored in, property would perform worse than money allocated to drawdown, or gradually reinvested into Isas.
Of course, a fall in yields in the near term that would effect the cohort set to access their pensions from April would further negatively skew the prospects for buy-to-let relative to alternatives.
Elsewhere, Mr Stadlmann said the new pension freedoms would be a boon for the advisory sector, predicting a surge in interest in the second quarter and an ‘exponential’ rise in demand thereafter.
He added the process of advising in this space, especially for wealthier clients, would evolve into a more holistic model and, perhaps echoing the concerns over property investment, said in the first instance the consideration should be on the tax position, not eventual investments.
This would involve delving into the full client “balance sheet” and the position for the family in the foreseeable future, which would “take a minimum of three conversations on average” before recommendations were being made.
Discussing potentially solutions, he said there would be a rush for alternative “low-risk income solutions” that avoided the “reckless conservativism” that some have suggested typify fixed income portfolios in the current market.
ashley.wassall@ft.com
