Great news for pensions

pensioners having a party

In his revised budget, George Osborne has delivered good news and bad news for property investors, giving with one hand but taking with the other, changes include:

  • Early Access to Pensions – on the positive side, those over 55 who have large pension savings can now have early access to them
  • Mortgage Interest Relief – property investors will no longer be able to offset mortgage interest against rental income

Early Access to Pensions

Over 55’s were the real winners from the latest budget update.

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Over 55’s can use existing income for buy to let investment

Those aged 55 years or older can now get their hands on a lump sum pension payment. But before they can merrily skip off to their local estate agent and purchase a buy-to-let investment the Chancellor also announced that mortgage interest relief is restricted to the basic rate of income tax.

Mortgage Interest relief for Buy to Let Landlords

However, on the flip side private landlords did not fare anywhere near as will from the recent budget. Property investors will now no longer be able to offset mortgage interest against their rental income.

This means private residential landlords will now no longer be treated like a business meaning they need to pay tax on their borrowings – the relief has decreased from 40 per cent to 20 per cent, in line with the basic rate of income tax.

The chancellor has also restricted the 10% ‘wear and tear’ deduction, which will only apply when maintenance/repair expenditure has occurred (from April 2016). Full details can be found at the Inland Revenue website.

However, this wedge in the buy to let market will be slowly phased in between 2017 and 2020.

Tax Year% of Finance Costs deductible from rental income% basic tax rate reduction
2017 – 20187525
2018 – 2019 5050
2019 – 2020 2575
2020 – 20210100
New Interest Relief Rules

The hotly debated issue of residential rental income providing a better revenue stream than pension payments has again reared its head. The Chancellor may have tried to off-set the influx of seniors cashing in their pension cheques as deposits on a rental property by curbing BtL tax incentives but this will do little to deter pensioners from leaning on the residential market as a better income stream.

Here’s Why

The average retirement income was approximately £15,800 in 2014, that is, 15% down on 2008’s income of £18,663. In short, pension income is steadily decreasing. However, between 1 April 2013 and 31 March 2014 the average rental income for a two-bedroom London property was £17,760. Meaning than London property delivers an average income 12.4% better than pension schemes.

Now, in my mind, off-plan purchases provide a greater benefit if buyers can or are willing to wait 12-24 months for a rental income stream. This process typically involves a £2,500 reservation fee before contracts are exchanged in 28 days upon which a 10 per cent deposit is required.

This means you are securing a property at today’s prices and don’t require a mortgage until six months from completion – at which time you can top up your deposit or sell it on. Selling on the property is gambling on the expectation that values have risen and you will at least get your money back. However, assuming that you complete, your yields are likely to be much stronger as rental values are likely to increase during this time.

My one caution is that pensioners should be aware there are a limited number of lenders who will provide buy to let mortgages to over 55’s. The Mortgage Works and Singaporean-based bank, United Overseas Bank (UOB), have created products tailored to this market.

So, with stronger income streams and better returns than pension funds are providing, especially with historically low interest rates, it is no wonder more and more people are ploughing their money into bricks and mortar investments.