The pension reforms have arrived and no doubt this will be a significant improvement to the lives of many pensioners. But I have a concern that some pensioners with a newfound pocketful of cash may make a big mistake and jump headlong into the buy-to-let market.
As someone heavily involved in the design and delivery of mortgage products, I always run the ‘Mum Test’ to ensure that our products will be good for consumers. The test involves me thinking about whether I would want my Mum, or any other close relative, to buy one of my products.
This is how my latest Mum Test ran in my head:
Mum: Hi Alan. Guess what?
Mum: I have just bought a house!
Me: What did you do that for?
Mum: I cashed in my pension and the bloke at the property club said I would get 6 per cent interest guaranteed.
Me: This is a wind-up, right?
Mum: No. It’s much better than putting your money in a bank account, isn’t it?
Me: But you’ve never been a landlord before!
Mum: I watched that programme on TV and it looks easy.
Mum: The property club was great. They made it sound so easy!
You may think I am nuts but that is truly what ran through my head when I started to think about the unintended consequences of the reforms.
Do not get me wrong – I think the reforms are a good thing. But it is up to us in the mortgage industry to ensure that pensioners do not become landlords without knowing about the pitfalls as well as the upsides.
We all know about the type of people who are likely to prey upon nouveau riche pensioners, so let’s watch out for those dodgy property clubs that we saw operating during the boom – which convinced countless people that being a landlord was a road to riches – and report them to the FCA, if necessary.
The FCA has powers to deal with property clubs and you can find further information on this in PERG 11.2. Lenders will no doubt remember that those so-called property clubs were a hotbed of mortgage fraud, which told naive people that they could get properties at a discount and that they would not have to put any cash into the deal. The sting in the tail was the fees they charged – and the horrendous losses that many unsuspecting new landlords got saddled with.
Lenders and mortgage intermediaries can play a big part in protecting consumers. So between us we must make people aware that rental yields are not guaranteed, that voids do occur and that managing and maintaining a rental property involves time and effort as well as cost. And taking on a buy-to-let mortgage should not be undertaken lightly.
Also, as soon as we see some D-list celebrity launch a programme about how easy it is to be a landlord and how you can make a fortune by buying a rundown property, sprucing it up in less than an hour and then letting it out for loadsamoney, we should all be very nervous.
A poll carried out in 2011 by insurer Esurv showed how influential this type of programme can be. Almost a third of the 1,032 people polled stated that the rise of television property programmes – such as Grand Designs, The Home Show, Kirstie’s Homemade Home, Location Location Location and even MTV Cribs – had inspired them to put much more effort into maintaining the appearance of their home and influenced how they decorated it.
The Government has stated that everyone who is eligible to take advantage of the new reforms will have access to free, impartial guidance. This will help consumers to make informed and confident choices on how they put their pension savings to best use.
The guidance, called Pension Wise, is available through a number of different channels: via the internet, over the phone or face to face at a Citizens Advice Bureau. It is entirely impartial, and therefore not given by anyone who could be trying to sell a product.
Of course, becoming a landlord will no doubt be a good option for some pensioners and, as long as they consult a regulated mortgage adviser, it could be a much better option than buying an annuity at today’s dismal rates.