2014 has been a record-breaking year for new and used car sales. The fiscal tail-winds created by the gradual stabilising of the economy, lower unemployment, rising house prices and falling fuel prices, have no doubt contributed to sales increases. Total new car registrations in 2014 were 2,476,435 units – a 9.3% hike on 2013 - delivering the highest sales numbers in a decade. Last year also saw a rise in user car sales to 7.4m worth an estimated £42.7bn (Source: BCA Used Car Market Report 2014). Used car prices also went up 8% so margins at the forecourt should be improving.
Simultaneously, the percentage of private new cars sales financed by Finance and Leasing Association (FLA) members has continued to nudge up and is now standing at 75.9%. So more than three-quarters of new cars are being financed by Personal Contract Purchases (PCPs) or equivalent car financing packages. We also know that manufacturers have been increasingly financing discounts to help dealers to clear stock. More good news for margins.
Others have been saying that sales of new cars have been boosted significantly by successful Payment Protection Insurance (PPI) claims which have generated average windfalls of close to £3,000 per person and pay-outs over the last four years totalling £18bn.
However, I’m going to be controversial and say that the PPI gold rush will not be over until deep into this year. Furthermore, before the £400m a month PPI gold rush begins tapering off, we will see the start of a new gold rush which we believe will also benefit car dealerships just as much as PPI claim windfalls.
If anything the next boost from ‘Pension Freedoms’ could be even more lucrative for dealerships because the sums likely to be released from retirees’ pension pots will be - on average - much larger.
So what is Pension Freedoms exactly? In last April’s Budget the Chancellor George Osborne declared that from April 6th 2015 everyone over 55 and with a Defined Contribution (DC) personal pension pot will be able to cash it in. Up until this date most kept their personal pensions running until they retired, perhaps at 65 years old, then used the bulk of the money they had accrued to buy an annuity - effectively an income for life.
The Government have been mounting an assault on annuity providers saying that they are offering poor value and that poor customer communications meant most retirees were defaulting into annuity purchases when other options are already available. Since the announcement annuity sales have already halved and some now believe as few as 5% of retirees will continue locking themselves into an annuity after April when annuity purchase becomes voluntary. And the speculation is that the Chancellor will confirm in this week’s budget that those that have already purchased an annuity will be able to cash these policies in, so that they too can benefit from the new freedoms.
Since the April 2014 announcement there has been much idle speculation about the potential increased sales of Lamborghinis as pensioners cash their pots in. Although most pension pots would not stretch to the ultimate super-car, the average pot sizes for the group that will benefit most from the new freedoms look to be substantial nevertheless.
This group is 55 to 59 year olds and has a total average wealth of £680,000. Ninety percent of them own their own home. They are much better off than the average UK near-retiree, according to the Institute of Fiscal Studies. A quarter of them have over £116,000 in their DC pots. We also know that the top 20% of UK households have an average of £35,000 in a DC pension. Now contrast these numbers with average DC pension pot sizes for 50-59 year olds across the whole population which is half that size at £17,758 (Source: Institute of Fiscal Studies). The stats don’t lie – those most likely to take action to free funds from their pensions have far more to access than the average.
Indeed, pensions administrator Hyman Robertson has calculated that some £6 billion of assets is heading for the one-way exit door between April and July 2015 alone. A more recent Censuswide consumer survey found some 40% of people were planning to withdraw all or part of their pensions as soon as they are allowed. And with more than 600,000 baby boomers reaching retirement age each year through until 2018, it seems obvious that many might be in the market to buy a good used or new car to kick off their retirements in reasonable style.
We believe that if dealers want to take full advantage of the Pension Freedoms gold rush from 6th April 2015 they should start drafting their sales and marketing plans right now! Which of your prospects and customers are aged over the aged 55-59 come 6th April 2015 and contemplating cashing out all or part of their DC pensions? Which fit into the group most likely to benefit from new pension freedoms?
Clever dealerships will definitely be thinking about how to position their companies - and perhaps the latest stock of new or used cars - as that ideal early retirement purchase. Are you ready for the next gold rush? We believe the new Pension Freedoms movement could prove at least as lucrative a driver for new and used car purchases as PCP loan maturities over the next few years. So let the good times continue to roll!