Warners LLP | Pension Freedom – will you have a Braveheart moment?

It has been described as the most radical change to private pensions for a generation.

For the first time, people have the freedom to use their pension savings to spend or invest in other ways to secure their future living standards and livelihoods.

And for many – driven by the fact that most older savers are likely to be long-term home owners and so have seen the benefits of capital growth in the housing market – there is a strong lure towards investing money in properties.

But what are the questions that retirees need to be asking – and what impact will this ability to unlock pension pots have on the housing market, and the private rented sector in particular?

The changes are about giving older savers more flexibility. As always you can take a quarter of your pension pot as a tax-free lump sum. For decades, most people have used the remainder of the money to buy an annuity – a product that pays an income each year until you die. Now, anyone aged 55 and over, can take the whole amount as a lump sum, paying no tax in the first 25% and rest taxed as if it were a salary at their income tax level.

With this new set of rules, and pension investors coming from a generation where house-buying was ingrained as indisputable lifestyle choice, the attractions of entering the property market are clear to see.

But while there is much to value in being given more right to choose on how you invest for the future, as always with key investments, careful decisions need to be made.

Despite the existence of annuities for such a long time, I think a lot of people don’t have an understanding of them, and so instead, see property as something tangible that they do understand.

I suspect investing pension pots in property will be attractive particularly to people who perhaps already have buy to let property/properties – as they’ll understand how it works and can see how it is a good long term investments.

But it is important that all aspects of buying property-to-let are factored into the decision-making process – for example repairs need to be factored in, along with management costs etc. In addition, for someone looking for regular pension income, the security of income and also the yield will be more important factors than a traditional buy to let investor where, in many cases, capital growth will be a priority.

Consideration will also need to be given on the merits of going after particular types of homes or areas, to try to maximise profits, such as cheap restoration jobs, spacious ex-council houses, new-build city centre apartments, etc.

People need (with the help of their financial advisers) to ascertain what their financial needs are – whether high yield, whether capital growth, whether low-cost in terms of maintenance and upkeep, etc. Once they know their priorities then they can select the appropriate type of property to invest in.

As with any investment, the higher the potential return normally correlates to a higher risk. For me, security of tenure is vital – so that there are minimum voids in rental periods and tenants can be easily replaced.

So, for prudent responsible investors, I can see the ‘Braveheart freedom’ moment in investing in property working and, in turn, giving the market a boost.

But it is vital people are aware of the risks in any property investment and the costs of maintaining that investment.

And, of course, with Warners being the leading estate agency to find properties for sale in Edinburgh, we are ideally placed to help you find and buy that ideal investment. Our unique ‘drawing tool’ available on our website also always you to pinpoint properties for sale in a specific geographic area or address.