Without giving away my age, my next birthday in April coincides with the government’s new pension reform.
From April this year, savers over the age of 55 will be allowed the option of taking a number of smaller lump sums from their pension pot instead of one single big lump, with 25% of the sum in each case being tax-free.
These pension reforms will be of most benefit to those who have built up a large pension pot. So, for example, someone with a fund of, say, £1m could walk away with a tidy tax-free lump sum of £250,000.
There has been much speculation that these “pensioners” will use some of their draw-down for a new car, holiday of a lifetime, university fees or such like. If, however, they have an eye to their future retirement security, it is equally possible they might decide to put their “booty” towards buying a property investment. The potential to attract some of these investors into the auction room and how to make them feel comfortable as newcomers to the auction process is something many auctioneers are already thinking about.
The most likely previous property investment made by the majority of these baby-boomer investors is to have bought their own house or perhaps the odd residential buy-to-let.
So, what might they buy with a £250,000 fund?
The obvious purchase might be a second home – not necessarily a pukka investment. Or, since most of us have some knowledge of the residential market (although not necessarily the problems residential tenants can bring), the “safe investment” would be a residential buy-to-let.
With a not-insubstantial cash fund, however, which could be used to lever further funding to increase the purchase pot, it might be more appropriate to consider a small commercial investment. Perhaps something local to home they can keep their eye on, typically a shop, office or industrial unit.
For the majority of small investors, commercial property is more difficult to fund. So, armed with a war chest, these new young pensioners should be able to steal a march on this sector of the property market where commercial yields are generally higher than residential (typically 7%, compared with 5%), albeit capital growth may be more limited.
Even though to the uninitiated a commercial investment might feel like a step into the unknown, assuming the property is let on sensible repairing and insuring terms at a rent that pays its own way, the new investor should be able to be fairly relaxed, leaving the tenant to trade, comply with his lease and keep the property in reasonable order.
Of course, the downside is the risk that the tenant does not keep to his side of the bargain, or that he even disappears. This could happen with most types of property investment, but with good advice from a surveyor at the outset the prudent pensioner should be able to weigh up the odds.
Finding the right commercial investment might not be as simple as buying an off-plan residential buy-to-let, but this is where auctions can be a useful resource.
A variety of commercial investments pass through the auction room quite often, offering the more local investor an opportunity he might not see through a high street agent. With auctions offering a transparent and speedy buying and selling process, the well-prepared new breed of investor should not be shy to go along and bid, provided he does his homework beforehand. This could involve speaking with the auctioneer, who might be able to allay any concerns, and also taking independent advice from a surveyor to obtain a balanced view.
So, come April 2015 we could easily see silver surfers who haven’t been to an auction before visiting the room ready to buy their first commercial investment. And who knows, after having driven to the auction in my newly acquired three-wheeler, I may even be joining my cohorts.
Philip Waterfield is director at Strettons
