Pension worries – the facts, and a solution

If you were to reach retirement in 15yrs – 20 yrs and be genuinely surprised by your lack of income from your Personal or Company Defined Contribution pension I would be so bold as to say – where have you been for the last couple of years?

This may seem harsh but there is so much in the press I cant believe anyone could fail to be aware of the financial situation we are currently facing and the knock on effect it is having on our pensions.

However just in case you have just been too busy in your day to day life and the pension reality has passed you by, please read on. This blog is aimed to get you up to speed. It really isn’t a subject that you can choose to ignore if you wish your retirement to be untarnished by hardship.

Firstly, let me share some cold hard facts:
• The last five years have seen appalling returns on pensions and millions of people’s retirement plans have become endangered (Money Mail 10th July 2012).

• Pension savers have earned on average just £1.36 a year for every £100 in a typical pension since 2007. This is way below the minimum £5 they were told to expect in illustrations. This severe underperformance has actually caused the Financial Services Authority watchdog to be so concerned by the performance of such ‘average’ funds that from 2013 it is banning companies from promising such high returns. Instead savers in company pensions will be told to expect a measly 2% a year growth on their savings. This will affect 16 million people by 2020.

• The affect on the compound growth rate of only 2% v 5% is massive. For example if you were to take £100 and apply a 5% compound growth rate for 15 years you would have a total value of £207.89. Take the same £100 and apply a 2% compound growth rate and you end up with only £134.60. 35% lower.

• In addition to your saved pension pot being smaller the Quantitative easing programmes have had a massive impact on Annuity Rates. So your smaller pot of money will buy an even smaller on-going income for you. In July 2008 a Male age 65, with a £100k pension pot, could purchase an annuity (Guaranteed for 5 years, with Level Payments and Joint 2/3rds) worth £6,740 per annum. In July 2012 the same £100k would only purchase an annuity paying out £5,081 per annum, a 25% decrease. (www.thisismoney.williamburrows.com/ratetables)

Few employees equate the dire returns of the stock market and the massive £375 billion Quantitative Easing programme to their pension pots, but hopefully the facts above will illustrate the severity of the problem.

So now having understood the extent of the issue what can you do about it? After all the papers seem to highlight the issue but any proposed solutions are simply based on the same old standard traditional responses, in the form of:
• National Savings and Investments, Government Bonds (although the consensus amongst professional investors is that gilt yields are too low to make them attractive)
• Money on Deposit (but with interest rates due for another cut this is also unattractive)
• Cash Isa’s (however the best tax free cash Isa is currently paying only 3.3% – which is really not that far above the current rate of inflation).

So what is the solution?
How can you avoid the train wreck which is heading uncontrollably towards us all and get a better return on your money long term?

The best thing to do is to look for an investment vehicle which is a different asset class to Stocks and Shares and invest so that you receive income every month.
Investing in Property for cash flow allows you to achieve this. You can:
• Control where you invest
• Control how much money you invest
• Offset your expenses
• Own an asset which will never drop in value to £0
• Have your debt eroded by inflation
• Leverage the income of others, in maximising your returns
• Achieve highly attractive returns

To provide you with an example, my last four properties purchased for investors via my HandsFree Property Investment business,  have achieved an average on-going Net Return of 7.9% i.e. this is the income after all costs have been taken out. This far exceeds the Stock Market and supports your pension by putting ‘real money’ into your pocket.

This figure is based on an interest only mortgage – however I recommend over time as the rents rise and inflation erodes your debt you move to a repayment mortgage. Through careful planning this means by the time you retire and require the income you could have a fully unencumbered property. You will have to pay tax on your income (but you do on your Pension income if it is anything worth having!) but you will still be able to offset the running costs of the property for tax purposes. And of course on top of the physical cash flow, you also have the added benefit that over time you could benefit from capital growth.

If you would like to understand more how property investment can ease your pension worries please do not hesitate to contact me on Tel 07783 506649 or email me at gill@altonpropertypartners.co.uk

Gill Alton

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Gill Alton is the founder of Alton Property Partners, which provides a comprehensive and personal Property Portfolio Building Service for investors in the UK.

Alton Property Partners manage the entire investment process, from sourcing property at a discounted value, co-ordinating the Mortgage, arranging the refurbishment, right through to ensuring it is ready for the rental market.

The service is specifically aimed to support those who recognise the value of a UK investment portfolio, but lack the time, or knowledge to be able to invest for themselves because they are full time employees or Business Owners. With full consultation and comprehensive financial analysis, clients can be assured that their portfolio of strong yielding properties will be built to exacting standards and they will be kept up to date every step of the way.

Having been involved in property for 16 years Gill has built a personal portfolio for her family, and in addition to Alton Property Partners, runs a Property Mentoring Business, Venus Property Mentoring which focuses on supporting new investors onto the investing ladder. Having originally left the Corporate world to be a Qualified Mortgage Broker, Gill’s husband now focuses on their family Mortgage Brokerage in Maidenhead – Alton Mortgages.

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