‘My holiday home is my pension’ has just taken on a new meaning.
The pension reforms may have a big effect on the property market in Cornwall
Over the years I’ve met many owners telling me that their holiday home is their pension, often saying that they didn’t want their money tied up so they couldn’t get at it if they need to and they had no faith in the financial services industry. Over the years the government has addressed some of these concerns by creating Sipps (self invested personal pensions) where you control how the money is invested and many institutions allow great flexibility in choosing funds but it has always been a defining principle that the only a quarter of the fund could be drawn on retirement, the rest must be used to provide an income.
This year’s budget produced a huge but very welcome surprise for the industry with George Osborne completely removing the restrictions on taking money out of your pension pot once you are 55 (this age limit will rise over time). This could mean that in future people will be more inclined to put the money into a pension than buy a holiday home but I suspect that there will be a far greater boost to the market from people either drawing down or anticipating drawdown and using the money to fund a holiday home.
In last issue’s article (see blog.abovebeachcottages.co.uk) I spoke about losses from refurbishment and a high mortgage being used to produce tax free income with one of the ways this could work being the use of a pension lump sum to clear off the mortgage. This has been made even more practical with the new arrangements giving lots of flexibility to take income from the property or the pension in the most tax efficient way.
The devil is in the detail of course and the lurid headlines about pensioners buying Bugattis all failed to mention the crucial point that withdrawals above the normal 25% will taxed as income, inevitably pushing into the 40% band and maybe into 45%. Careful planning will be necessary.
Despite the potential negatives I can foresee plenty of people withdrawing large sums to fund holiday property purchases or buying with mortgages to be paid off by a pension withdrawal as it’s an investment you can enjoy and over the last 20 years has probably been as good as any.