Christine Reid punched the air when she heard Britain plans to tear up the limits on what people can do with their pension savings. Instead of relying on a “paltry” income, she can now invest in property.

By Svenja O’Donnell Mar 28, 2014 7:26 AM ET

The biggest shakeup of the pensions industry in almost a century, announced by Chancellor of the Exchequer George Osborne in his budget last week, has thrown open the options available to Reid and millions of other Britons approaching retirement.

Starting next April, instead of having to buy an annuity — an income from a life insurer — people will be able to spend their retirement savings however they want. After years of dwindling annuity returns, Reid says buying a property in northern England to rent out is looking attractive.

“Annuities give you something paltry,” Reid, a 56-year old management consultant, said in an interview in London. “In retirement what you want is a steady income, and there’s a certain amount of safety in bricks and mortar. I’m certainly considering putting some of that money towards a buy-to-let.”

Her decision underlines a risk stemming from Osborne’s proposal to lift tax restrictions on the 13 million savers in so-called defined-contribution pension plans. Money invested in property instead of annuities could stoke a housing market that some economists say is already in the grip of a bubble in London and the southeast.
Property Boost

“I’d be surprised if this move didn’t boost the property market,” saidRoss Walker at Royal Bank of Scotland Group Plc. “The number of people who invest in property is relatively high, it’s a safe store in value. But this is not going to help rebalance the economy. You also have to ask whether that will be fueling the bubble.”

About three-quarters of pensioners currently buy an annuity, according to government figures. People wanting to withdraw their savings instead face a 55 percent tax charge.

Under Osborne’s proposals, the tax rate for drawing down pensions will be as little as 20 percent. Legal & General Group Plc Chief Executive Officer Nigel Wilson estimated this week that the annuities market will shrink 76 percent to 2.8 billion pounds ($4.7 billion) by 2015 as retirees choose other investments.

According to the Association of British Insurers, a 60-year-old retiree investing 24,000 pounds in an annuity would get a maximum of about 1,250 pounds a year. That assumes the person has pension savings of 32,000 pounds and takes 25 percent as a tax-free lump sum, as allowed by the current rules.
Parental Help

By comparison, a residential buy-to-let property in London returned an average 14.6 percent in gross rental yields and capital appreciation over the past year, and an average 8.9 percent across England and Wales, LSL Property Services estimates.

With 36 percent of first-time buyers in London and the southeast already relying on financial help from their family, the new pension rules may make it easier for parents to help their children buy a home, according to Sue Foxley, research director at real-estate agent Cluttons.

Ed Stansfield, an economist at Capital Economics Ltd., said that wealthier pensioners may choose property over other investments.

“It is potentially a risk,” he said. “Many people might feel like leaving their kids something tangible like their property, which always goes up in value rather than stocks and shares.”
Housing Boom

U.K. house prices are surging, powered by record-low interest rates and demand from foreign buyers seeking safe assets. Prices rose 6.8 percent in January from a year earlier, the biggest annual gain since 2010, with values in London alone jumping 13.2 percent, government data published March 25 show.

The boom has helped to spur the British economy, which grew 1.7 percent in 2013 and is forecast by the Office for Budget Responsibility to expand 2.7 percent this year, the most since 2007.

Bank of England financial-stability officials saw increasing momentum in the housing market and pledged to remain vigilant to “vulnerabilities” and to take more action if needed, minutes of their March 19 meeting published yesterday showed.

While the full pension reforms will be implemented next year, the Treasury has eased some restrictions already, including raising the amount that can be withdrawn from a pension fund without incurring the 55 percent tax rate.

Pensions Minister Steve Webb acknowledged last week that the changes meant some retirees could use up their savings too early. “If people do get a Lamborghini, and end up on state pensions, the state is much less concerned about that, and that is their choice,” he said after the budget.

Christine Reid said “savvy” investors will be better off under the new rules.

“At the end of the day you’ve earned that money by working your butt off all your life, so you should be able to choose what to do with it,” she said.

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