Evidence has recently emerged that the buy-to-let (BTL) tax changes George Osborne introduced while Chancellor (particularly the phased removal of tax relief on mortgage interest and 3 per cent extra stamp duty) are having their desired effect. Lending data suggests BTL owners are selling properties and paying down debt. This tax squeeze on rental property may or may not be positive for the housing market, but it is very unhelpful for one group the government says it wants to help: the self-employed.
Success in encouraging people to join workplace pensions thanks to automatic enrolment—now up to 8.5m employees—is an achievement ministers are justly proud of. Recently, they have been looking at ways to pull in the self-employed, largely due to figures showing that just 12 per cent of this growing group contributes to a personal pension against 60 per cent of employees. A previous solution, the Lifetime Isa, has gone nowhere so now there is talk of fiddling with National Insurance to create something similar to auto-enrolment.
This is probably a waste of time. Research published this autumn by the Pensions Policy Institute (PPI) highlighted two important but largely ignored facts about the self-employed. First, they are not savings laggards but keep pace with those in employment in every age bracket. Second, they have little faith in pensions: just 28 per cent of self-employed people think pensions are the safest way to save for retirement, against 52 per cent of people in employment.
Instead, the PPI reported that 43 per cent of the self-employed workforce believe property is the safest way to save for retirement, against 25 per cent of employees. Not surprisingly, they are much more likely to own a second property than people who do not work for themselves.
Policy-makers should recognise that this is an entirely rational way for them to behave. Self-employment means having the flexibility to cope with the uncertainties that employment helps to alleviate. No wonder many self-employed people balk at the idea of putting money into a pension with no chance of accessing it until they are at least 55. It’s the opposite of financial flexibility.
If instead they buy a rental property, they get a combination of immediate income and long-term capital growth as they pay down mortgage debt; they can access specialist mortgage funding that depends on their rental income rather than their earnings; they have flexibility to access capital if necessary by re-mortgaging; and they overcome the erratic patterns of income that make it hard to save a fixed monthly amount into a pension and gain the benefit of “investment cost averaging” that this brings.
Rental property makes a lot of sense for self-employed workers, but not apparently from the government’s perspective. Tax changes designed to discourage “amateur landlords” appear to be squeezing the BTL market and inadvertently making retirement saving more difficult and expensive for a group of people that ministers are busy trying to help (sadly by inventing a new and more complicated version of a product that they mostly don’t want).
