The Government has set out plans for a £250 per year ground rent cap on leasehold homes – but some campaigners warn that people’s pensions could take a hit as a result.
Some property owners with leasehold homes pay ground rent to a freeholder for the land beneath their buildings, and many face high annual charges.
These will be capped as part of a new bill, but lobbyists have repeatedly argued that this could mean a reduction in the value of pension funds, which sometimes invest in freeholds.
Experts have said that although some funds will be hit, the majority of consumers will see a “minimal impact”.
The i Paper runs through the details below.
What is the reform?
Housing minister Matthew Pennycook set out plans for a £250 per year ground rent cap in the Commons on Tuesday, which will reduce leaseholders’ fees, with many paying over £1,000 a year currently.
The cap will drop to a “peppercorn” rate – meaning effectively zero – after 40 years, and new leasehold flats will be banned as part of new measures in the draft Commonhold and Leasehold Reform Bill.
Why are pension funds affected?
Some pension funds invest in freeholds as part of their portfolio.
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These freeholds offer long-term income streams to pay out future pension benefits and the cap on ground rent will reduce this income stream, which could affect the value of the investment.
A spokesperson for the Association of British Insurers said the organisation “supported proportionate leasehold reform”, but said “pension funds required predictability and stable rule of law if they were to have the confidence to invest.”
“We are deeply concerned that retrospective changes to existing property rights set a troubling precedent and undermine confidence in contract certainty,” they added.
Most pensions will face a ‘minimal’ impact
Experts have said properties with leasehold arrangements represent only a tiny proportion of total pension fund assets and so for most savers with workplace pensions or self-invested personal pensions, the impact will be small.
Jennifer Crichton, Senior Wealth Planner at Killik & Co said the impact would be “minimal” for most pension savers.
“The hope is that pension funds have adequately diverse portfolios so that today’s announcement will have only a limited impact, although in some cases, the long-established ground-rents system may have been relied upon too heavily,” she said.
Dan Coatsworth, head of markets at investment platform AJ Bell, added that most pension firms had also been preparing for leasehold reform for a long time.
“Reform of the ground rent system has been on the cards for some time, and valuations for related investments have been hit. Pension funds and life insurance companies may well have already started reassessing such holdings, and today’s news will exacerbate that thought process,” he said.
Who will be hit most?
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Crichton added that pension savers with a higher exposure to residential freehold investments “could be the unintended losers of what is a welcome change for many leaseholders.”
Coatsworth said the changes could create “uncertainty” for certain parts of the investment market.
He gave the example of the UK-listed Ground Rents Income Fund, adding: “Shares have lost two-thirds of their value over the past five years, the last three years of which it has been winding down its business. Its shares have fallen a further 8 per cent today on the news.”
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