Published 14 Nov 2014
What Will Pension Reform Mean for First Time Buyers
Earlier this year the Chancellor, George Osborne, announced a radical overhaul of pension rules. Under reforms in the Government proposal, those over the age of 55 will be able to take out their entire pension as cash from April 2015.
In this article, we take a look at the possible impact that new pension flexibility coming into force next year will have on first time buyers.
Pension rules from April 2015
From April 2015, those over the age of 55 will be able to access their entire pension pot and draw down as much or as little of their pension pot as they want.
Under reform changes in the pension:
- You may take up to 25% of your pension pot as a tax free lump sum. Some or all of the remaining 75% can then be converted into a taxable retirement income.
- You may take up to 25% of your pension pot as a tax free lump sum. You may then take some, or all, of the remainder as a cash lump sum, which will be taxed as if it were income.
- You may withdraw your pension pot in stages with 25% of each withdrawal tax-free and the remaining 75% taxed as if it were income.
The changes have been introduced to allow those over the age of 55 complete choice on how to use their pension to fund their retirement income. It is also hoped that it will encourage more people to save for retirement in the future.
There has also been reform on what happens in the instance of your death. It was announced that the death tax on pension funds of 55% will no longer apply. If you die before the age of 75 with some or all of your pension fund invested, it will pass down to your beneficiaries tax-free. This will only apply to those who make payments on or after the 6th of April 2015, rather than those who die on or after the 6th of April 2015.
Full and impartial advice on changes in pension rules from April 2015 can be found on the The Pensions Advisory Service website.
What will this mean for First Time Buyers?
Earlier this year, George Osborne commented, "we will legislate to remove all remaining tax restrictions on how pensioners have access to their pension pots. Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want. No caps. No drawdown limits. Let me be clear. No one will have to buy an annuity.”
What does this mean for First Time Buyers then? Thousands of over 55s will have access to their pension pots enabling them to reinvest their savings where they see fit. This could be in stocks or shares, as well as in property.
House Price Index from Right move in October 2014 showed a 2.6% increase in the average UK property asking price from September 2014 and 7.6% rise year on year, reference. In Greater London this increased further by 9.6% year on year and 10.0% in the South East.
With house prices continuously rising and a dense population attributing to high demand in assured tenancies, many over 55s may look to the property market to invest in their newly acquired cash reserves.
Tony Steeles of Modern Mortgage Solutions comments:
"The pension reforms could have a significant impact on First Time Buyers. We may see a rush of clients over 55 looking to use their pensions to purchase property, especially as the returns on a pension cannot be guaranteed and often end up being below expectations. For some the idea of buying a flat as an investment will be seen as a better option than what a pension may or may not pay out. This will then affect the availability of cheaper properties on the market that First Time Buyers are usually considering."
Cash rich over 55s will likely see a surge in the number of Buy to Let Mortgages in 2015 and beyond as they seek to reinvest their life savings in a booming property market. We could see an increasing demand level in the housing market on lower value properties creating added pressure on First Time Buyers trying to get onto the property ladder.
There may be some relief for First Time Buyers however as taxation on withdrawing your pension fund may mean that most opt to withdraw in stages to reduce the amount of tax paid. Furthermore those who have opted to take out the full lump sum of their pension pots will not be eligible for Shared Ownership properties that seek to help First Time Buyers.
As Tony Steeles comments:
"The safeguards in place for affordable housing (i.e. you cannot own another property, must take out a mortgage and cannot be a cash buyer, etc) will prevent cash-rich over 55s buying into the affordable housing market but I believe more and more First Time Buyers will be forced to look to affordable housing and this reform will no doubt lead to a lack of supply of homes at the cheaper end of the market. We may also find an increase of clients who have released money from pensions posing as First Time Buyers trying to buy affordable housing as an investment rather than to live in, so we will need to be more vigilant against this."
"Maybe the slight bonus for First Time Buyers is that over 55s will have access to lump sums that may then be gifted to their children as deposits for a mortgage. Over the last year there seems to have been a significant increase in the number of gifted deposits being used rather than buyers saving the deposit up themselves – another sign of how difficult buyers are finding it to save enough to secure a mortgage."
Shared Ownership can help First Time Buyers
Eligibility criteria for Shared Ownership stipulates that those applying for the affordable home ownership scheme must be a first time buyer (for full details visit Shared Ownership eligibility). Unlike on the open housing market, your Shared Ownership property must be your principle residence and you cannot currently own a home anywhere in the world.
Shared Ownership helps many first time buyers get a foot on the housing ladder. Shared Ownership is designed as a stepping stone for first time buyers to completely owning your own home, allowing you to buy further shares in your property when you can afford to. With Shared Ownership you will own part of the value of your home, rather than paying rent with no return.