Property Investment As A Pension Rescue
There are many times when I feel lucky to have had my eyes opened to the potential of property investment and I have to thank my husband for that
. Whether he ventured into the world of investing in 1996 knowing all the benefits it would bring, or whether he stumbled into it blindly is really irrelevant. The outcome is we now have our feet well and truly planted in property and as a family we are positioned well financially.
So as I sit in a motorway station penning this blog I look around me and I wonder just how many other people have the satisfaction of knowing they have planned and taken action for their retirement.
A recent survey conducted by Scottish Widows May 2012, identified that UK Pension savings had hit their lowest level in at least eight years, with only 46% of people saving enough for retirement, and of the 5,200 surveyed 22% of those aged between 30 yrs and State Pension Age (who earned more that 10,000 per year) said they were saving nothing for retirement. That is simply alarming!
There is no doubting these are difficult times and our economy is in a mess the Governor of the Bank of England Governor was even quoted last week as warning that Britain is not even half way through the economic crisis. So from a pensions viewpoint the situation is unlikely to get better in the short term and can you afford to wait for the medium or long term? Even the Quantitative Easing programmed we are currently implementing gives with one hand, while taking with the other, as it negatively impacts the Annuity Rates.
You only need to meet a person in their late fifties / early sixties for whom work is drying up (through no fault of their own) and see the fear in their eyes at the realization of 25yr 30 yrs of hardship and money worries and you will know what it is like for the golden retirement they dreamed of to simply become a pipe dream
The massive gap between what people hope to live on in retirement and what their savings might achieve is illustrated in the same Scottish Widows survey, with the average retirement income aspired to being 24,300. However, with an average total savings pot of only 150,000 the reality is this would be able to buy a retirement income of only 5,700 a year. Filling the gap with increased pension contributions would mean you having to save an astronomic amount each month. An amount which would be untenable.
Thankfully however, property investment offers a pension rescue plan that will allow you to bridge that gap between the retirement you are heading for and dreams and goals you have.
As part of a balance portfolio property brings you massive benefits. The following are a few of the key advantages, which can help you, build your own pension safety net:
1.Investing for cash-flow allows you to have an asset which puts money into your bank account each and every month.
2.You are able to leverage other peoples money and make your own money work harder for you. With a pension you only receive an income based on the money you have saved, with property you receive 100% of the rent, even though technically you may only have actually committed 25% of your funds to the property. (i.e. 75% LTV mortgage)
3.You can chose where you want to invest
4.You have the flexibility to set your own rental values and minimize your voids.
5.You can re-mortgage money out of your property tax free to reinvest and you dont have to wait until you retire.
6.You can sell your property
7.Your rental income is not reliant on passing successfully through two gates, neither of which you have any control over:
a.The stock market (as in how much your pension savings will actually be worth)
b.Annuity Rates (as in how much monthly income your savings can buy you)
And if this isnt enough proof, further proof of the strength of property as your pension rescue can be found be reviewing the details on five of my latest property investments. Even erring on the side of caution (as is my style) by calculating the results based on the lower rental income, the figures below illustrate the power of property to boost your pension income and save you from a retirement of misery.
These are my Definitions:
Money invested this covers all the fees, 25% deposit, refurbishment, legal costs and valuation. I.e. the physical money you have had to put into the purchase.
Net Return Year 1this allows for all costs including one off Sales costs i.e. Legal Fees, Valuation Fees. The net return calculation is based on the lower projected rental income (as described below)
Net Return Year 2 based on the ongoing return achieved on the total money invested. Again the calculation is based on the worst case rental income scenario
The Monthly Projected Cash flow - I show this as a band, the lower figure being an indication of the income after all costs have been allowed for, allowing for example for 500 maintenance a year, 2 weeks voids etc. The higher figure taking into account simply the known costs such as Mortgage, Insurance and Letting Fees. It is likely the monthly income you will receive overtime will be somewhere balanced between the two.
Money Invested
Net Return on Investment Yr 1
Net Return on Investment Yr 2
Monthly Projected Cash-flow
House 1
25,460
7.8%
10.33%
165 - 229
House 2
32,093
6%
7.25%
160 - 229
House 3
27,105
7.2%
9.32%
202 - 268
House 4
28,225
6.2%
7.43%
145 - 212
House 5
26,622
7.5%
9.52%
166 - 230
Net returns of 6% - 10.33% far exceed both pensions and savings interest rates. And even allowing for the lowest projected monthly cash flow the income per year equates to:
House 1
1,974 pa
House 2
1,913 pa
House 3
2,424 pa
House 4
1,740 pa
House 5
1,980 pa
And remember the average money that has been invested across the 5 houses equates to only 27,900.
If you were to take the same 27,900 as a lump sum and understand how much income this would earn you in a pension you would unfortunately be grossly mislead, as pension providers are allowed to quote a standard compounded growth rate of 7%. However, this is unrealistic.
Money Management Magazine which was quoted in the Telegraph 6th August 2011, admitted that one of the leading providers of pensions data, had confirmed that the returns being achieved across pensions have been nearer 4% over the past 15 years!!
So what would this mean to your money?
27,900 invested today for 22 years (i.e. when I am 65 years old) at 7% compound growth would give you a pension pot worth123,608 with which to purchase an annuity, the same money with a 4% compounded growth rate will however suddenly be worth a miserly 66,120, a reduction of 54%. So can you really afford to believe the pension calculators on the internet?
It is no wonder those heading to retirement are worried they have been mislead. I find it truly shocking that the Financial Services Authority (FSA) allow Pension providers to continue to quote over inflated growth figures...even quoting 9% as the best case. After all if 4% has been the average achieved over the past 15 years,this is only going to be pushed down further due to the world wide economic meltdown.
So the question is do you want to be the one pinning all your hopes on your pension fund? Or are you forward thinking enough to realize you need to be looking for your own pension rescue?
After all remember you have to buy an annuity with your pensions saving...you have no choice! And goodness only knows what annuity rates will be like in the future when you can get access to your money. Can you afford to take that gamble?
If all of the above has failed to win you over and help you understand how property investment for cash flow can be your rescue plan. Then simply remember you dont have to wait till your retire to reap the benefits of rental income, over the next 22 years from one house along I will have earn t 44,000 (i.e. based on 2,000 pa average). What will you have learnt from your pension?
by: Gill Alton
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