After a 30-year career in property management, Lynn Jackson had been looking forward to retiring in December. So it’s a cruel irony that the 65-year-old has been denied access to her pension because it is trapped in a frozen property fund.
Ordinary investors have around £13.5 billion of savings in property funds, which typically own office blocks, warehouses, restaurants and shops. But a slew of funds were suspended when the pandemic hit because of uncertainty in the property market.
Today, the Mail reveals how experts are predicting that investors may be forced to wait until next year before they can access their money.
A slew of property funds were suspended when the pandemic hit because of uncertainty in the property market
Diane Earnshaw, of investment research group Square Mile, says: ‘Property funds rely on expert valuations to determine what the properties are worth.
‘Valuing such property was extremely difficult during lockdown. It wasn’t possible to value a shop building, for example, when the shop wasn’t open for business.’
Industries such as retail, hospitality and fitness have slowly reopened, but normal levels of activity need to resume before restrictions on accessing funds can be lifted.
Property funds are obliged to hold a proportion of investors’ money in cash, to pay to those who want their savings returned. But once this cash reserve is gone, they have to sell properties, which takes time.
Following a flood of withdrawal requests, the funds were closed to avoid being forced to dispose of buildings at fire-sale prices, disadvantaging other investors.
City watchdog the Financial Conduct Authority (FCA) says that fund suspensions exist to ‘protect investors in exceptional circumstances’. Many investors will remember when the popular Woodford Equity Income fund was frozen following a flood of withdrawal requests amid concerns about its performance.
The fund was eventually closed, with savers losing up to half their investments.
Lynn Jackson, who lives in Leeds with her husband, Dean, 71, tried to cash in her £15,000 pension pot with Aviva earlier this month.
But after submitting the forms, she received an automated email stating her request had been denied.
It emerged that this was because half of her pension is held in Aviva Investors Pensions Property Fund — reserved for pension investors only — which had temporarily barred withdrawals.
Lynn had selected to invest half of her savings in the fund because she thought property was a good long-term bet.
‘I was livid,’ she says. ‘I wanted to access my pension during the summer so we could buy a touring caravan and start thinking about holidays for the family when I retire in December.
‘At no point had I been told that there was a problem with accessing money in this fund. And besides, half of the money is in other funds that are not suspended.
‘I tried to contact Aviva to challenge the decision, but got nowhere.’
It was only after Money Mail intervened that Aviva conceded that its refusal to pay any money was an error.
Bricks and mortar: Property funds typically own office blocks, warehouses, restaurants and shops
The firm says Lynn will now receive the portion of her savings not in the fund — but it is unclear when she will be able to access the rest of her money.
Ms Earnshaw says: ‘The uncertainty surrounding how to value property is being lifted in some sectors, such as warehouses and factories, which are now open for business again.
However, it is difficult to know when all property funds will be open, and there is still uncertainty for the hard-hit retail sector.’
Even when funds do reopen, investors should prepare for losses, says Ryan Hughes, head of active portfolios at AJ Bell.
‘The big property funds have seen falls of as much as 7 per cent since the start of 2020, which means that when suspensions are lifted, savings could drop or will have dropped by the same amount,’ he says.
‘Property fund investors should be prepared for a very bumpy ride over the next few months.’
Investors might be further irked to know that they will still be charged fees while their funds are frozen. A typical fee is 0.82 per cent, according to AJ Bell — slightly higher than the average 0.75 per cent for standard funds.
Things could get also worse for property fund investors who want to access their cash quickly: the FCA has proposed new rules that would mean savers have give up to 180 days’ notice if they want their money.
And, while they will be committed to withdrawing their cash, they won’t know what price they will get until the end of the notice period.
The consultation on the new rules ends in November. If they are given the go-ahead, the FCA expects to introduce them early next year. Experts say the proposals could put many people off investing in these funds.
However, Ms Earnshaw says: ‘If there was a notice period, it might mean the funds wouldn’t need to keep so much of investors’ money in cash as a reserve for withdrawals, and more could be invested, which may improve returns over the longer term.’
As part of diversifying your investment portfolio it is recommended you have some exposure to property as it is not connected to how the stock market performs.
As a rule of thumb, however, you should not have more than 10 per cent of your total portfolio in property — particularly if you may need quick access to cash.