People should think very carefully before placing their incomes in retirement at the mercy of the buy-to-let property market, warns the Actuarial Profession.
The warning comes as product providers gear up to for changes to the rules for Self-Invested Personal Pension Plans (SIPPs). From 6 April 2006 SIPPs may, for the first time, invest directly in residential property. This may at first sight appear to offer an attractive income and capital tax shelter for buy-to-let properties inside a pensions wrapper.
But the Actuarial Profession cautioned that there are a number of reasons why residential property may not be suitable for many peoplesâ€™ pension investments prior to retirement, or for a fund which is being drawn down in order to provide an income:
The initial outlay is likely to be substantial in relation to the existing savings. Existing property cannot be injected directly into a pension fund, and investors should consider the cost of rearranging existing pension investments, and the balance of their revised portfolio.
Savers are permitted to borrow part of the cost of the property, leading to an element of gearing which increases the overall level of risk, especially if interest rates were to rise
Most people need to draw their pensions as soon as they retire, and may have little discretion about when this happens. If the property market is not performing well at that time, a forced sale may be required at a relatively low price
Overseas property investments may be subject to local legislation that inhibits dealing with them, and in some circumstances they may prove extremely difficult to sell.
Residential property can be a volatile investment. Rental income (which cannot be guaranteed) represents a large part of the return, and letting voids and/or marketing costs can quickly erode estimates of rental returns. Properties come in relatively large units and cannot be subdivided; and the property cycle (the period over which values rise and fall) is very long; all one’s eggs are in one basket.
Uncertainty over rental income is especially risky if the property is retained after retirement as part of a “draw down” arrangement, and the investor relies upon the income to fund his or her pension.
Only more financially-secure investors, such as those who already own a buy to let property and who wish to ensure that future rises in value are free from CGT, or those who have large existing pension funds and who perceive property to offer high returns for acceptable risk, should consider buy-to-let property.
Alan Goodman, Chairman of the Financial Consumer Support Committee of the Profession, commented: “There are just 150 days to go before the rules change and people may invest their pension funds in buy to let properties. We are sure some providers will be looking to cash in on this market with enterprising new investment vehicles.
“But people must not be seduced into buying them – even though house prices have rocketed and stock markets have slumped in the recent past. The value of houses, too, may fall as well as rise and the lack of liquidity that could arise from being a forced seller in a falling market could have very serious implications on an individual’s ultimate income in retirement.
“We have identified important reasons why people should think twice about putting all their pension eggs in one property basket. There may be a place for property within a diversified portfolio, but this is best achieved using a property fund rather than investing directly in bricks and mortar.
“In our view the vast majority of people should invest in pooled funds, rather than much riskier individual properties. We therefore urge everyone to consider very carefully whether residential property is a suitable investment for their pension funds and if so, ensure they get good independent financial advice before they go ahead.”