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Profit from the Lamborghini pension

A small minority of pensioners will take advantage of new freedoms by cashing in their retirement savings and going on a spending spree - so which companies are likely to benefit?
March 27, 2015

If you read the newspapers you'll probably have noticed full-page adverts imploring pensioners and those nearing retirement to take advantage of the chancellor's generous new pension freedoms by splashing the cash on things like cars, cruises and double glazing. So it seems reasonable to assume that companies in the business of selling these products might be in for a multimillion pound tailwind as retirees go on a shopping spree.

In fact, between 200,000 and 400,000 individuals are expected to make use of the new freedoms in the first weeks and months of the regime, according to research from Hargreaves Lansdown. Of those planning to use the freedoms, 47 per cent said they would just take the tax-free cash sum.

Of those planning to take more than the 25 per cent tax-free amount, nearly one-third said they would take less than £10,000 in addition to the lump sum, but a further 37 per cent said they would take less than £30,000.

The more interesting part of the research was how people said they planned to spend their money. A prudent 47 per cent said they would reinvest it, 15.9 per cent said they would spend it on home improvements while 15.2 per cent planned to pay off debt. Property investment piqued the interests of 14.5 per cent of respondents, while a small minority - 7 per cent - said they wanted to treat themselves to a holiday. Nearly as many look set to splash out on a new car and gifts for family members.

 

Spending spree

Anecdotally, travel agents, conservatory companies, car retailers and other sections of the retail and leisure industry have said they expect a windfall after the changes come into place. But few senior executives are actually willing to take a view, and those who do are less certain that the legislation will have as big an impact as perhaps the media has made out.

Safestyle (SFE), an Aim-listed company which sells double glazing, has a relatively high age demographic among its customer base. Management says that if pensioners have access to higher disposable income it should benefit the company, but they're not specifically including a tailwind in their forecasts. "It won't be a game-changer" a spokesman said.

But what about cars? Exchanging that old banger for a leaner, greener motor might well be a sensible course of action for the cautious pensioner. Andy Bruce, chief executive of Lookers (LOOK), remains sceptical and believes that changes are likely to benefit used car sales, more than the new car market. "We don't think that the recent pension reforms will have much of an effect on people buying new cars. You see, 79 per cent of private new cars are sold on personal contract purchase (PCP) as it's the most advantageous way to buy a new car, even if you could afford to buy it outright. We don't think that logic will change," he said. "Also, the average UK pension pot isn't that large meaning it's unlikely that people will suddenly go out and purchase a Lamborghini. That being said, the new reforms may have a small, positive effect on used car sales where there are more cash buyers."

Robert Forrester, the boss of UK-listed Vertu Motors (VTU), reckons it can't do any harm, though, pointing to the impact that PPI compensation payouts had on car sales.

"New and used car sales do well when people are confident. If they have cash, they feel secure. So, if they're not worried about their annuities, they might indeed use some of that cash to fund a deposit on a more efficient vehicle. You don't need much to have a new car and I can't think of any downside for the motor retailing industry."

Indeed, the average price for a new Vauxhall Corsa is just £99 a month on finance after a £99 deposit. But, given that people over 55 tend to shun credit, they might just buy the car outright or put in a much bigger deposit, says Mr Forrester. The average mid-range new car costs 'just' £12,000 to £13,000. However, Mr Forrester points out that some people might want something a big special – not a Ferrari or Jaguar as mooted by commentators - but perhaps a little Mazda MX5 convertible, a roadster which is really good value for money and good fun.

 

Home improvement

The more obvious beneficiaries, however, are the DIY outlets. Home Retail (HOME), Kingfisher (KGF) - which runs the B&Q and Screwfix brands - Topps Tiles (TPT) and perhaps even Laura Ashley (ALY) might see an uptick in sales. Newly-listed furniture retailers ScS (SCS) and Dfs Furniture (DFS), might also benefit as pensioners decide to spend a small, but not insignificant sum, doing up their homes with money they previously thought was inaccessible. Wealth managers and bank savings accounts might get a boost, too, if people decide to try their hand at DIY investing or stash the cash away in an easily accessible savings account - particularly now given that the rules on Isa withdrawals have been relaxed.

And the housebuilders? Well, the idea of using one's pension to secure an income stream from a buy-to-let property is a pie-in-the-sky, according to our property specialist Jonas Crosland. He reckons that kind of cash from your average DC pension pot would be nowhere near that needed for a deposit on a property. Add in the extra costs of being a landlord and it would hardly seem worth it.

Cruising is one industry that has been touted as a big beneficiary of the pensions reform. That could help companies such as Saga (SGA) and Carnival (CCL). Saga did some customer research on the topic back in April 2014. They polled more than 10,000 over-50s around the proposed annuities changes and 8 per cent of those surveyed said they might consider spending some of their newly-accessible funds on a holiday. The type of holiday, however, was not specified.

 

Running out of cash

But perhaps the best way to determine what might happen in the UK is to look at other countries where these freedoms already exist. Steve Groves, chief executive of Partnership Assurance (PA.), points to Australia and the US, where such pension freedoms already exist. "Evidence from Australia suggests 50 per cent of pensioners run out of money in first 15 years. In the US, 45 per cent of people run out of money before they die," he said.

In the UK, the average value of defined contribution pension pots for people without access to financial advice tends to range from £10,000 to £30,000. And it's this bracket which Mr Groves believes will be more likely to spend beyond their means. In fact, he thinks there's a real chance that as much as a quarter will spend more than they can afford. "When you give people freedom and choice you need to accept that people will make bad choices. It's inevitable that a significant proportion will take out more than they can afford."

Others, those with financial advice who tend to have more like £50,000 to £60,000 in their pots, are more likely to annuitise based on what they need to cover basic living expenses and might then spend what is left on discretionary items. So, while the vast majority of people will behave responsibly, a "significant minority won't be able to help themselves", says Mr Groves. He reckons that together, this could yield a nice tailwind for the retail and leisure industries as people splash out on cars, holidays and home improvements, such as new kitchens and bathrooms.

"We have a society where people aren't particularly good at deferring consumption and now we are giving them instant access to money," he says. "And, the people these changes are most likely to impact are those with pots of £10,000 to £30,000 who don't have access to financial advice. That pot, once take net of tax, will still be a meaningful amount to spend on something material, so this is the group most at risk. Conversely, these are probably the people who also need that money the most to live off of."

 

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