There are some very strange contradictions in play within the world of retirement planning at present, it seems – and around the use of buy-to-let (BTL) property in particular.
The reality of life as a landlord is as follows: after two decades of tax-favoured growth for private sector landlords and the emergence of BTL as a key element of many people’s financial plans, former chancellor George Osborne introduced various tax and regulatory changes to clamp down on the burgeoning BTL industry, which he saw as a threat to first-time buyers. These changes included a 3 per cent stamp duty surcharge from April 2016 and progressive cuts to tax relief on mortgage interest payments from April 2017, as well as stricter lending criteria for BTL mortgages.
Recent research shows those measures have had a massive impact. Property consultancy Savills reports that existing BTL mortgages are being redeemed at a rate of around 50,000 a year and that growth in BTL loans as a proportion of the total mortgage market has stopped. Savills predicts the number of rental property transactions will fall by more than a quarter by 2022. In line with that, the National Landlords Association has announced that 20 per cent of its members are planning to sell some of their portfolio in 2018.
Smaller landlords getting out
A report from the Intermediary Mortgage Lenders Association (IMLA), meanwhile, provides more dramatic evidence of changing attitudes, with the revelation that new investment by private landlords has fallen by 80 per cent, from £25 billion in 2015 to just £5 billion last year.
Such changes in attitude are hardly surprising. While those with larger portfolios can sidestep the changes by setting up as limited companies, for many small landlords the sums no longer add up as tax relief on outgoings is whittled away (reducing to 20 per cent by 2020), particularly at a time of torpid house price growth. If the consequent rising costs mean they can’t produce a meaningful income stream and there’s little in the way of longer-term capital growth to focus on either, many BTL investors are surely thinking there must be easier, more rewarding ways to make provision for retirement out there.
Against this backdrop, the findings from the latest Wealth and Assets Survey by the Office for National Statistics seem completely out of kilter. This ongoing report looks at the nation’s attitudes towards saving for retirement and how they change over time, and the latest one (covering July 2016 to June 2017) indicates that property investment is still widely regarded as a great idea.
Thus, among working adults, although 40 per cent recognise employer pension schemes as the safest route to save for retirement, a further 30 per cent pin their colours to the property mast – and that figure has increased steadily since 2010. Yet occupational pensions offer not only full tax relief but also matching employer contributions. Astonishingly, almost half (49 per cent) of all adults surveyed believe property ‘makes the most of your money’ against a meagre 22 per cent favouring workplace pensions, with 6 per cent choosing Isa savings (see chart). Here too, the figure in favour of property has steadily risen over every period surveyed since 2010, supported presumably by the strength of house price growth over much of that time.
Time for a pensions facelift
In contrast, support for employer pensions as the best way to make the most of your money has dropped off since 2014, even though auto-enrolment has become increasingly widespread throughout the subsequent period.
These findings raise a big question. If the crippled buy-to-let sector still appears a better idea to the UK population at large than the occupational pension schemes offering double extras of employer and government cash, in which most of them must already be enrolled, is it time for a proper pension system facelift? People are clearly not recognising the benefits on offer. Does stock market investment seem a scarier proposition than the solidity of bricks and mortar? Or are they blinded and bemused by the tax complexities surrounding those benefits? If it’s the latter, maybe it’s time to simplify the system.
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