Pension pot buy-to-lets in UK losing their appeal

Record house prices in the UK are beginning to deter would-be landlords armed with pension lump sums.

The recent change in the British pension system introduced at the beginning of April enabling over-55s to cash in their pension plans for investment may not trigger a “silver wave” of new buy-to-let landlords, say experts, because the market is losing its appeal in the UK…

According to investment advisers Hargreaves Lansdown, only around 10,000 of the 500,000 savers impacted by the new rules will try their hand at becoming a buy-to-let landlord as yields tumble in many parts of the country.

The UK’s overheated property market makes investing in housing in parts of London, the southeast and southwest prohibitively expensive for most pensioners, while the more affordable areas of the north and northeast do not attract sufficient rental returns to make investment worthwhile.

Nationally, the average rental yield in the UK has fallen to five per cent, according to data from LSL Property Services, while in London that figure is even lower at just 4.3 per cent. “In the capital it can be hard to generate income after costs at all,” said LSL’s Rob Thomas.

The majority of private pension pots that could be released under the new scheme are below £100,000, and while final salary pensions can be worked into the arrangement, many leading financial experts have warned that encashing pensions in this way is less lucrative than keeping the workplace schemes in situ.

Cashing in a pot of £100,000 will attract a tax bill of at least £20,000, and with the average UK property a record £286,000, few pensioners will be able to purchase a buy-to-let home outright. However, historically low loan rates for buy-to-let mortgages (currently at four per cent) mean getting a mortgage for a rental property is not so difficult.

The alternative that more and more Brits are investigating is to invest in property in Spain, where the current strength of the pound against the euro – and the fact that property prices have fallen by an average of 40% since their peak in 2007 – makes Spanish real estate an increasingly attractive investment.

Spanish lenders have also begun loaning in greater volumes this year than they have since 2010, while rental yields in some of the more in-demand regions of the Costa del Sol are as healthy as they have ever been.