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Housing Secretary in backlash after proposing buyers raid pension pots to buy homes

Housing Secretary James Brokenshire has clashed with Government departments and pension experts after he proposed allowing first-time buyers to use their pension savings to raise a deposit to buy their home.

The idea was immediately quashed by former pensions minister Steve Webb, warning that it risks ruining people’s retirement.

The Department for Work and Pensions is also reported to have complained that it did not approve and had not been informed of the proposal.

There were also suggestions that Brokenshire’s proposal would simply hike house prices.

Speaking at the Policy Exchange think tank, Brokenshire said the Government should look at allowing an individual to use part of their pension pot as a deposit on a first-time home purchase.

He said: “We should be changing the necessary regulations to allow this to happen, protecting the integrity of pension investments but allowing lenders to innovate and design new products to bring this opportunity to consumers.

“It seems rather obtuse that we would deny people the opportunity to do this, given that we know those who own their own home by retirement are on average a) wealthier and b) do not have the burden of the largest expense in retirement – accommodation.

“And it is, after all, their money.”

He said the average 35 to 44-year-old has a pension wealth of approximately £35,000 and could combine that with a partner to support a deposit.

He added: “To those who are in their 20s and finding it difficult to save, this idea offers a genuine route to a deposit.

“We can say to that generation that there is a way, they do have a choice, they too will have that freedom.”

Brokenshire said similar schemes already exist within New Zealand’s Kiwisaver and in Canada where regulations were recently changed to allow people to use up to $35,000 of their pension savings to purchase a home.

A spokesman for Brokenshire said the timing of the introduction of such a scheme would be up to the next Prime Minister once Theresa May is replaced.

Such a change would require industry consultation, which could include elements such as a cap on withdrawals.

The spokesman denied this could create a bigger pensions crisis in the future, adding: “There are multiple models that would protect the integrity of pension investments.

“This assumes everyone would use the new freedom, which is not likely. The idea is about accessing their pension pots earlier and still having decades beyond to save.”

Internal departmental analysis by the Ministry of Housing, seen by EYE, suggests buyers may end up with a lower value pensions pot over 30 years, but would have higher monthly savings due to mortgage repayments being cheaper than renting and would have a financial asset by owning a property.

Webb, a pensions minister in the Conservative and Liberal Democrat coalition government and now director of policy at Royal London, said: “The amounts going into pensions for young people are pretty small already but at least they are starting young – if you empty that then they’ll end up working till they’re 75.

“It is fine to find giving young people new ways of buying a home but if there aren’t enough houses, then you have not helped them get a house and you’ve ruined their retirement.”

Tom Selby, senior analyst at AJ Bell, said: “This idea smacks of dangerous political short-termism.

“While the housing market clearly has its problems – particularly for first-time buyers who might struggle to afford the sizeable deposits now demanded by lenders – allowing people to raid their pensions is not a sensible answer.

“Chronic undersaving for later life is one of the biggest challenges facing society today, so a proposal which encourages people to drain their pension pots risks making this problem even worse.

“There is no guarantee that such a proposal would actually help people get on the housing ladder at all.

“Unless the Government dramatically boosts the supply of homes in the UK then this plan risks stoking house price inflation.

“It’s also not clear why housing should be the only beneficiary of early pensions access. People could legitimately ask why, for example, it shouldn’t be extended to cover debt repayments or to help towards wedding costs.

“The further you go down this rabbit hole the greater the risk you fundamentally undermine the central plinths of the UK’s retirement savings landscape.”

By MARC SHOFFMAN

Source: Property Industry Eye

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Tax changes could see landlords place £28bn into pensions

The gradual decrease of mortgage interest tax relief could drive out ‘amateur’ landlords from the property market and place £28bn into personal pensions, a provider has said.

One in five buy-to-let landlords are planning to sell up in the next five years due to policies impacting their profitability, such as the 3 per cent increase in stamp duty on second homes brought in in April 2016, and a phasing down of mortgage interest tax relief to 20 per cent, according Aegon.

This could lead to landlords beginning to re-think their investment strategy, the provider said.

According to Aegon, the average property price sits at £225,000, meaning if a landlord releases one quarter of this upon selling the property, they could pay £56,250 into a personal pension net of tax. For higher taxpayers, this turns into £93,750 after claiming tax relief.

While there is a cap of £40,000 on how much can be paid into a pension each year tax free, those who have not used their allowance in the previous three years can catch up, meaning they can pay in up to £160,000, including tax relief.

Multiplying the £56,250 figure by the estimated 500,000 investors planning on selling equates to £28.1bn.

Steven Cameron, pensions director at Aegon, said: “The landscape for landlords has changed significantly in the last two years.

“Having a buy to let property has been seen by some investors as an alternative to saving in a pension. Investors turned to the property market in a bid to secure better returns as property values rose considerably, albeit with significant geographical variations.

“However, tax and regulatory changes and the prospect of rising interest rates is prompting 1 in 5 to consider selling.”

He said those holding property to fund their retirement in the first place may wish to put the money in a pension instead.

But Alistair Wilson, head of retail platform strategy at Zurich, said landlords should be wary of breaching their annual allowance limit, currently set at £40,000.

He said: “For many landlords, using the proceeds from a property sale to boost their pension is likely to make good financial sense, especially as they get a 20 per cent bonus in tax relief from the government.

“However, they should be wary of exceeding their annual allowance, or they will lose this top-up.”

Mr Wilson said one of the winners of any trend from property to pensions was likely to be investment platforms, which would see a boost in inflows as more and more people invest their pensions via platforms.

“We may also see a boost in demand for property funds, as investors seek a similar replacement for their bricks and mortar investment,” he added.

Phil Smith, director and group chief executive of provider Embark Group, said any tax policy influencing net yields could be expected to impact investor actions greatly.

He said: “Buy to let property investors have been progressively and negatively impacted in recent years, and it is only the low cost of debt that has kept them in the game.

“As debt costs rise, switching accumulated equity into pension contributions, taking eligible tax relief at source, and then investing into non-residential property is now exceptionally attractive when comparing like to like.

“We are seeing this in our pension books and have continued to build an sizeable property capability as a result.”

Source: FT Adviser

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Eight things that will (probably) happen in 2018

1. Prices will continue to rise more than your pay for most of 2018

The cost of living is increasing at a near six-year high of 3.1%, having more than doubled during 2017, largely as a result of the fall in the value of the pound following the EU referendum in June 2016. Meanwhile, average wage growth is running at 2.3% (or 2.5% if you include bonuses) which means that real earnings are falling.

Household energy costs, petrol and car insurance have been among the worst culprits for price rises. Most of the big energy companies hiked tariffs during the year, with British Gas adding 12% to electricity bills in August. This time last year the average price of petrol on Britain’s supermarket forecourts was 111.9p a litre, but now it’s 116.5p. There’s not much we can do about that, unfortunately, although most experts are expecting a flat or mildly falling oil market in 2018 as US shale production continues to rise, offsetting attempts by the Organisation of the Petroleum Exporting Countries (Opec) to increase prices.

Car insurance has rocketed by an average of £200 over the past five years, according to Comparethemarket.com. Between September and November 2012, the average motor insurance premium stood at £559, but today premiums for the same three months have reached an average of £758 – a rise of £199. After years of increases in insurance premium tax, 2018 is unlikely to see further hikes so the inflation rate in car insurance may finally begin to slow.

Most economists expect the general price squeeze to continue through 2018, although there is some light at the end of the tunnel; the Bank of England is forecasting inflation to slip back to 2.4% by the end of 2018. Meanwhile, wage growth is expected to at least maintain its current rate, or moderately accelerate to above 2.5%, so Christmas 2018 could see the first recovery in real earnings for years.

2. Train fares will jump on Tuesday

The bad news is that the first big price rise of 2018 is just days away: on Tuesday UK rail fares will rise by 3.4% – the largest increase for five years. The rise covers “regulated” fares such as season tickets and long-distance journeys. But other fares can be raised or dropped at the train operators’ discretion. The price of an off-peak trip from Preston to Manchester goes up 6.6% to £16 from £15, while a London to Slough off-peak ticket is increasing by 9% from £9.60 to £10.50.

3. Letting agency fees will (eventually) be abolished

Tenants in England typically pay £404 every time they move, according to campaign group Generation Rent – and more than £800 in some parts of London. There can also be additional charges for tenants on low incomes and needing rent guarantors (at an average cost of £152), or simply needing to move in on a Saturday (an extra £62). But at some point in 2018 (the government has not given a precise date yet) England will follow Scotland and ban letting fees to tenants. Landlords threaten to retaliate with rent increases, but with a weak economy and lower pressure from migration, few experts reckon rents will rise by anything more than 0-1% in 2018.

4. Pensions will be the big money story of 2018

Many people could be in for a shock when they check their pay packet in April 2018. That’s because of a big change that will affect millions of people, who will see a bigger slice of their pay automatically diverted to a savings pot for their pension.

Automatic enrolment went live in 2012 and but the total minimum amount paid in is currently just 2% of qualifying earnings – made up of 0.8% from the worker, 1% from the employer and 0.2% in tax relief. However, on 6 April this will rise to 5% – typically 2.4% from the worker, 2% from their employer and 0.6% in tax relief. In April 2019 the total increases again, to 8%. So, if you are an affected employee, how much might you – and your employer – have to pay into your pension?

For someone on £20,000 a year, it means they will lose an extra £33 a month when they see their pay packet at the end of April 2018. Currently, they are contributing the minimum 1% of salary, which works out at £16.67 a month, including tax relief worth £3.33. From April, this will rise to £50 a month (with £10 of tax relief), then in April 2019 it will rise to £83.33 a month. Employers will also have to put in lots more. Expect the opt-out rate to rise in 2018 – and for employers to use their increased pension payments as an excuse not to give wage rises.

5. The state pension will rise, tax allowances improve, but council tax will go up

From 6 April, pensioners entitled to the full new state pension (with a full 35-year record of NI contributions) will see their payments increase by £4.80 from £159.55 per week to £164.35 a week, which means there will be nearly £250 a year better off. The old basic state pension will rise from £123.30 a week to £125.95.

On the same day the new personal tax rates will come into force, with the chief change an increase in the personal allowance – that part of your pay not liable for income tax. It will go up to £11,850, a £350 increase from the current level. In practice, it turns into a £70 saving for a basic rate taxpayer, as it means that £350 more of their income is not liable to 20% income tax.

But much if not all of this will be taken up by potentially large increases in council tax. In a move slipped out just before Christmas, the government allowed local authorities to raise council tax by up to 5.99% next year. All councils will be able to raise council tax by up to 2.99% next year to fund local services, which is 1% more than this year. On top of this, 152 councils, which includes all London boroughs, unitary and metropolitan authorities and county councils, will be able to increase it by an additional “precept” 3% to fund social care services.

6. House price rises will slow to a dribble

Most people, particularly first-time buyers, will welcome a pause in house price growth, with most of the experts predicting just 0-2% rises in property prices in 2018 – and falls in the capital. For the first time since the financial crisis, earnings are likely to rise faster than property prices.

7. Interest rates will rise, and the stock market will wobble

Another 0.25% increase is expected in late spring, taking the Bank of England base rate to 0.75%. But unless the economy displays some unexpected perkiness, that should be the last rate rise of the year, so mortgage rates will stay low.

In 2017 the FTSE 100 enjoyed a rise of nearly 500 points, or more than 6%. In Frankfurt, the Dax index surged 13%, while on Wall Street the gains were even higher, with the S&P 500 advancing 18%. But after such a strong run – and with more interest rate hikes expected in the US – few believe 2018 will be anywhere near as good as 2017, with some predicting a major wobble in the market some time during the year.

8. The taxman will soon come knocking

Maybe you were one of the 2,590 people who used Christmas Day to fill in their tax return. But for the others who didn’t, the 31 January deadline looms.

If you are filing your 2016-17 return online for the first time, you will need to create a government gateway account if you haven’t already done so. Go to gov.uk/topic/personal-tax/self-assessment.

Angela MacDonald, head of customer services at HMRC, says filling in your tax return can be done anywhere and at any time, using your phone, tablet or computer. There are online webchats, live webinars, YouTube videos and social media support that can be accessed at any time, she adds.

Source: The Guardian