UK Pension reform and its impact on the property market
13th April 2015
UK Pension reform and its impact on the property market.
There are around 18.4 million people currently aged 55+ and from 6th April, those with ‘defined contribution' schemes will be given unprecedented access to an estimated £67.5 billion (1) of pension contributions as part of one of the biggest shake-ups in the UK's pension system. This will have wide-spread effects on the economy, including the UK's property market.
Background
Under the current system, upon reaching retirement age, most people take part of their pension as a lump sum (up to 25% is tax free) and use the rest to purchase an annuity - an insurance product that provides an income for life.
Although there are other options available, including withdrawing an entire pension pot, various restrictions and taxes and the high degree of risk involved make these less attractive to many people, meaning that around 75% of pensioners see little option but to purchase an annuity.
However, a longer life expectancy combined with fluctuations in the stock market (where UK pension funds hold around a quarter of their investments) and low returns on bonds mean that annuity providers are now offering less than they were previously - annuity rates reached an all time low in January 2013 - and people are retiring with a much smaller income than they expected.
This has caused a general lack of trust in the pension system and the government is concerned that people are being put off from saving for their retirement, which could in turn lead to a future pension crisis. To address this, they have introduced a number of pension reforms, including ‘automatic enrolment', but the latest changes are expected to have the biggest impact.
What is the current situation?
The big change to take effect from 6th April is that anyone aged 55+ with a ‘defined contribution' pension pot will have the freedom and flexibility to spend, save or invest their pension as and when they wish. The option to withdraw 25% of the pension pot tax-free will remain, as will the option to purchase an annuity, but people who want greater control over their finances can use the money in their pension pot as they see fit.
Example: Someone with a £400,000 pension pot would be able to take £100,000 (25%) as a tax-free lump sum, and would then have the following options with the remaining 75%:
1. Withdraw it immediately and pay income tax at the appropriate rate (based on total income - i.e. pension income plus any other income)
2. Buy a £300,000 annuity (which currently could provide an annual income of anything between around £7,000 and £21,000, depending on the age of the applicant and level
of cover)
3. Buy an annuity with part of the cash, leave the rest invested or withdraw it and spend it
4. Keep the £300,000 invested with the pension fund and draw as much or as little income as they wish
Information from Chesterton House Financial planning Ltd - http://www.chestertonhouse.co.uk/
