In what he described as the most sweeping changes to pensions and savings since 1921, George Osborne radically changed the rules which govern how pensioners get hold of their retirement savings. He may have just lit a fuse underneath an already heated housing market too.
His decision to move the market away from a reliance on annuities has sparked fears that if left to their own devices, individuals will spend the money, rather than securing an income to see them through their retired life. These fears are not unfounded – and the worst consequences of this are that individuals, having consumed their pension pot, will become wholly reliant on the state. A comment from Steve Webb, the pensions minister, on pensioners buying Lamborghinis is an extreme illustration of this. This is a bad outcome for individuals and society more broadly, as the state pension, while available to all, is a safety net. For many, a retirement income is a foundation to be built on – it is not meant to be the sole source of income for the majority.
However, the ability to take the cash on retirement raises an interesting dilemma for pensioners. What if the majority of people decide the annuity market is not good value (and for many it isn’t)? These individuals may therefore seek to provide their own retirement income rather than spend it all on outlandish purchases. One way is to plan your finances and draw down the pot. The other, is to seek out investments, other than annuities, that can create a stream of regular cash payments to provide a retirement income.
When looked at like this, one investment seems obvious – property. In this context, real estate has a number of features that are very desirable. First, people understand it. Second, you own and control it. Third, there is the growing problem of “generation rent”, with many younger workers having to rent as they find themselves excluded from the mortgage market. Fourth, if you buy an annuity, then once you die or you and your partner die, the pot is gone.
By contrast, if you buy a property the asset remains and can be left behind. It can therefore transfer to a partner as part of an estate and will continue to generate the same rental income for them. When the remaining partner dies, it can form part of an inheritance and an intergenerational wealth transfer can take place. Alternatively, if ill-health befalls an individual, the property can help to pay for medical care (the government have placed a limit on this of around £70,000). The flexibility and certainty of this as a retirement income vehicle is very clear.
This is, however, not without broader consequence. Property in the UK is already a bubble. It is a market that is hugely out of kilter. Average wages are somewhere in the region of £26,500, the average house price is £250,000, and the average price of all residential property is around £175,000, according to recent ONS figures. Even on a mortgage that is five times the average salary, which no longer exists post-credit crunch, the numbers do not add up.
There are a number of reasons for this. First, the UK does not build enough houses and so demand vastly outstrips supply. Second, in areas like London, many properties are bought as investments not homes, and there are even properties that lie vacant, while many struggle to rent. It is obvious why there is an increasing problem for generation rent.
Combining the structural problems in UK property, and these sweeping changes to pensions, leads to the conclusion, a storm is brewing.
Going forward, there is likely to be a group of cash-rich, savvy pensioners looking for an annuity type investment that they can control. Buy-to-let property is it. Consequently, generation rent is unlikely to become a new generation of property owners any time soon. With a large flow of money transferring directly to pensioners, property prices are going to be supported or even boosted.
The country could therefore find itself defined by two very distinct groups: generation rent and generation rentier.