There have been some major developments in the UK pension market with annuities now much of an irrelevance for many people. The UK government has introduced a variety of new options for pension fund money both prior to retirement and in retirement. UK-based rates and annuity rates are near all-time lows and many investors are now looking towards property as their long-term income stream.
Are we now on the verge of a major change in the way in which pension-fund assets are invested in the longer term and also in retirement?
Property income streams
There is no other vehicle which offers the same kind of long-term investment opportunities as a pension-fund with an array of tax incentives. The simple fact is that each and every government around the world would prefer individuals to fund their own retirement and will therefore do their best to incentivise pension fund investment. Even though worldwide base rates are at an all-time low in many cases investors are now looking at long-term asset switches in a very different light.
There is growing evidence that many people approaching retirement and actually in retirement in the UK are looking at property investment to fulfil their long-term income requirements.
Will this impact the UK property market?
It is worth noting that traditional domestic property cannot currently be purchased within a pension-fund but utilising the full tax incentives and then withdrawing money in retirement allows other investment opportunities such as rental property to be considered. If we take a step back and look at what drives property markets and property prices around the world, in its most basic form it is supply and demand.
If we see more and more people looking to withdraw funds from their pension funds in retirement, and perhaps earlier in specific situations, and then look towards property investment, this can only increase demand. The current level of new builds in the UK is well below that required to fulfil even current market demand and therefore this in itself is placing more pressure on prices. We can only estimate the long-term impact this striking change in investment strategy could have, suffice to say that more and more first-time buyers will be struggling to climb on the first rung of the ladder!
What can the authorities do?
It is changing pension-fund regulations which will fuel an ever increasing demand for property across the UK. The ability to withdraw a larger lump sum upon retirement will leave many people cash rich and looking for safe havens for their funds. In many ways the authorities have let the cat out of the bag and it would be difficult to backtrack on recent pension-fund changes without losing face. Therefore, demand for property in the UK is likely to increase in the short, medium and longer term from those moving into retirement.
There is a real danger that some areas of the worldwide property market could become the plaything of the rich and famous leaving first-time buyers with limited affordable properties. Yes, governments and local authorities will likely step in to assist with short-term investment programmes but in the longer term the difference between affordability and property prices is likely to expand. Will it ever return to historic levels?