The Growing Pensions Scandal and How To Protect Your Future! Pt 6

Retire poor, then die? Fact: recent figures show that 40% of people over 50 are saving nothing for their retirement. Fact: you would need a pension pot of £700,000 to receive an annuity of just £25,000 a year. Fact: you can lose up to 80% of your pension savings in fees alone.

Is there another option? Yes! In this series, Rod Thomas explains what has gone so dreadfully wrong with traditional pensions and how to use property as your pension instead.

In the last part of The Growing Pension Scandal and How To Protect Your Future! Rod looks at how much capital you will need. Using property as your pension will provide greater security, higher income and inflation proofing for a fraction of the cost of contributing to a pension!

If you would like to find out more about how to use property investment as your pension right away, then call us on +44(0)1273 447 300.

Part 6: How much capital do you need?

Perhaps we have saved the most important question until last. If you want to generate income for your pension, what capital resources will you need?

The answer is complex because it depends on many factors, but I will isolate the most important components here so that you can work it out for yourself. Alternatively, ask Axis for an introductory discussion on the phone or come and meet us.

To understand how much capital you need we need to recap on how a pension is funded. Basically, throughout your life, you build up a capital sum which is your 'pension pot' at the time of retirement. Within a traditional pension the rules (recently relaxed) have been very tough about what exactly you can do with your pension pot. For example, you have been allowed to take a maximum 25% as a cash sum.

Whatever is left in your pension pot is used to purchase an annuity. This is a guaranteed income for life. Most annuities are simple and are a fixed amount every year. Clearly this reduces in real terms because of inflation. Some annuities rise every year, but that means taking a lower amount to start with.

Finally, most annuities end when the annuity holder dies. You do have the option of a widow's pension which means that your spouse can continue to take the pension (usually at 50% of the previous rate) until they die as well.

So the approach to traditional pension building is to do this:

1. Contribute money, either regular savings and/or lump sums, to a pension scheme for many years.

2. At the time you choose retirement, ask what your 'pension pot' is.

3. Convert your pension pot to an annuity, providing a known income for life.

In the first of these six articles about property and pensions we talked about the rip-off deal that traditional pensions offer, so I won't repeat those facts here. Suffice to say that your pension pot, built over many years, dies with you so there is nothing for your inheritors!

What income do you want in retirement?

A property pension works in a similar way to a traditional pension. You build up capital for a number of years - typically as 'equity' in your property portfolio. Then at the time you retire you use the rental income as your pension.

Let's look at a table that compares a traditional pension with an annuity at (say) 5%, with a property portfolio returning 15% pa (Axis can do even better than this!)

You can see that the capital sum required to give you a pension income through an annuity is hugely more than the capital sum you need for a high-yielding property portfolio. You can do your own sums to work out what capital sum you need based on your chosen income level and yield/annuity rate.

It is clear that investors nearing retirement should be investing as much cash as they can in a high-yielding property portfolio, as opposed to buying annuities!

What about building the capital sum?

Of course, for younger investors with years to go before retirement, there is another equally important equation. How much do they need to build the required capital sum? This equation has THREE factors to consider:

Years to retirement
Average annual growth in equity
What capital sums you can contribute and when

We can't cover every eventuality in this brief article so let's just look at a comparison over a 10 year period. The difference is going to be even more marked over 20, 30 or even 40 years.

If there is one table in the entire series of articles I have written that causes you to take notice, then this should be it.

After ten years, based on performance since 2000, a pension savings plan is likely to offer little more than the money you originally started with! Compare this with 10 years of savvy property investment, where you could have grown your equity by almost 700%!

Now we do the clever piece and join the two parts of the pension puzzle together. Let's assume that the example above is what really happened and then consider what we do with our capital sums generated as shown. In both examples we started with £50,000 and allowed 10 years of growth.

If this isn't a scary table then I don't know what is. You can argue with me in detail about the exact percentages and annuity rates, but the bottom line is that starting with the same capital, our example property portfolio has ended up delivery TWENTY TIMES the level of income that a traditional pension would.

If you understand my thinking and agree with the principles I have shared, maybe it's time you took control of your own future and decided to focus your pension provision using property. Axis will be pleased to help you.

Where to next?

This is the end of six articles in which I have explored many of the major challenges surrounding pension provision and how you can use property to provide a far superior income. If you'd like to comment on this series please email me at rod@axiscontact.com and I will send you a personal response. I also invite you to leave your comments below. Thanks for reading!

If you missed the previous instalments, read Part 1: The Angry Man and Part 2: The Flaws in Annuity and Part 3: Managing Risk and Part 4: Cash v Borrowing and Part 5: When to Invest.

Live with abundance,