According to a report published by UCB Home Loans, the additional business could see between £3 billion and £5 billion spent on rental property for use within pensions over the next year, with mortgages accounting for around a third of this figure.
New pensions regulations which come into force on 6 April 2006, known as A-Day, will mean that, for the first time, residential property can be included within self-invested personal pensions (SIPPs). Property may be purchased and set against income tax, which means that a 40% taxpayer will effectively only pay £120,000 for a £200,000 property. Taxpayers at the lower rate of 22% would pay £156,000. If the property is let out, the rental income received will be free of income tax and, when the property is sold at a later date, any profit will be free of capital gains tax.
Further information on the fine details relating to the pensions changes is due to be released by the government later this year, following which mortgage lenders specialising in buy-to-let will be taking decisions on whether to develop new products related to SIPPs.
“Whilst the vast majority of buy-to-let lending will continue to be outside of SIPPS, we will be looking at ways in which products may be adapted to help customers take advantage of the new rules,” said Keith Astill. “We are unlikely to make any firm decisions until there is more clarity around the fine detail of the regulations – and that may not happen until next year.”
Around 100,000 Britons currently hold SIPPs. Industry commentators estimate that between 0.5 and 2.5 million people will take one out by 2010, with the market having reached 5 to 6 million people by 2020.
“The new pensions rules are the biggest change over recent years within the pensions market,” said UCB Home Loans managing director, Keith Astill. “It will have a marked effect on the buy-to-let market over forthcoming years and will be particularly beneficial to the self-employed sector, where individuals have to make their own pension arrangements in the absence of an employer’s scheme.”
Individuals will be able to pay up to 100% of their annual salary into a SIPP each year, up to a maximum of £215,000. The maximum size of the pension pot will be £1.5 million; anything above this will be taxed at up to 55%.
“The SIPP will be able to borrow up to 50% of the pension fund in order to buy a property,” said Keith Astill. “So, to buy a £150,000 property you would need a pension fund of £100,000.”
The boost to the buy-to-let sector is not expected to have any effect on house prices, as it forms a small portion of the overall housing market. However, there may be some downwards pressure on rental incomes as more rental properties become available in some areas. Latest figures from the Association of Residential Letting Agents show that rental yields currently stand at around 5.1% on houses and 5.3% on flats.
“People need to take a cautious approach when planning their pension arrangements and we would not advise anyone to put all their eggs in one basket by investing solely in property,” said Keith Astill. “Advisers will usually suggest that people spread their pension risks across a variety of areas, with property often accounting for 20% or less of the portfolio.”
UCB Home Loans also says that the long-term nature of a buy-to-let investment is even more important when it comes to pensions planning.
“We normally advise people to take a 10 to 15 year outlook when planning a buy-to-let purchase, and with a pension an even longer timescale will apply,” said Keith Astill. “People need to make sure they can afford a long-term commitment when they make a property investment through their SIPP.”
The lender says that people also need to be aware that setting up and running a SIPP will involve a certain degree of expenditure which is higher than that which applies to other types of personal pension, with annual charges for managing the fund and, in many instances, initial set-up fees as well.
