Why Your Pension
is a Ticking Time Bomb
and What You Can Do About It!
Apologies if what you are about to read appears blunt. But there’s no point beating about the bush. People planning for their retirement are facing a crisis of massive proportions. And they are sleepwalking into that crisis because of BAD advice from professionals who should know better.
If you are at that stage in your life where you are looking to lay down some plans for your retirement years, then you need to wake up. And you need to wake up now.
Unless you make the right decisions your retirement is going to be a financial disaster zone. Worst case scenario - you might not even be able to retire at all.
Retirement - The Fantasy
Retirement used to be something to relish. You could look forward to settling down after 40 or 50 years of hard graft, sitting back and enjoying the twilight years of your life.
The calculation was simple: you’d spend a large part of your working life, putting money to one side, maybe into a pension or other investment scheme, safe in the knowledge that come your 60th or 65th birthday, you’d have a giant nest egg ready to provide you with a tidy income for the rest of your life.
You could retire, safe in the knowledge that your future was going to be a succession of long sun-drenched holidays and endless rounds of golf.
Not any more. We now live in a world where retirement is a luxury fewer and fewer can afford. The financial landscape has changed. Recession and financial meltdown has created a climate of chaos.
And for millions of people, retirement has become something to be dreaded.
That’s the bad news. The good news is that if you are planning for your retirement now it’s not too late. You can avoid that fate. How? Read on.
What NOT To Do If You Want A Happy Retirement
Let’s start by looking at what you should NOT be doing as you plan for your retirement. And let’s explore why the traditional forms of investing for your retirement are not delivering.
Why Pensions No Longer Deliver Long Term Security
For decades, pension plans were seen as the simplest, safest and surest way to save for your retirement. Today, however, millions of people are facing a stark reality. They don’t work.
A generation of people are waking up to the fact that they have basically lost the gamble of a lifetime by following advice and investing in stock-market based pension funds. They were told that ploughing their pension savings into shares would pay off in the long term. But it hasn’t worked out that way. And now millions face an uncertain future.
Pension owners have been hit by a perfect storm of bad news.
First, they have been hit by the stock market crash.
Most pensions are linked to the stock markets. Shares - as measured by the FTSE 100 - have dropped by 15 per cent over the past ten years. As a result of this, the consultancy firm Aon says, a quarter has been wiped off the value of personal pension funds that are directly linked to the stock market since the start of the credit crunch.
Some reckon it’s an even worse picture. According to accountancy firm PricewaterhouseCoopers, people saving in personal pensions have lost 3 per cent a year for the past ten years. That means that someone who contributed £24,000 over the past decade and invested this in the stock market would now have a fund of just £21,000.
Making the situation even worse, annuity rates - which determine how big an income you can buy with your pension pot - have more than halved in the past 20 years. Back in 1989, a pension pot of £50,000 would have delivered a single 65-year-old man a pension income of about £150 a week. Today it would buy just under £65 a week. That’s less than half the money to survive in a world where things cost almost twice as much.
Third, and perhaps most distressing of all, pension savers are being royally ripped off by their pension providers.
A BBC Panorama programme in October, 2010 found that pension companies are taking the equivalent of 80% of money paid into some pension plans out in fees and commissions.
Panorama found that paying £120,000 into one HSBC pension plan over 40 years would result in £99,900 being taken out in fees and commissions. And this wasn’t an isolated example. A Co-op Individual Personal Pension came in at second most expensive, taking out nearly £96,000 in fees across 40 years from deposits of £120,000.
Dr Paul Woolley, who used to control an investment fund worth billions but is now a finance academic at the London School of Economics, told Panorama: "Fund management fees and brokerage have doubled in the last 10 years, amounting to one and a half per cent in fees. But the net return to pension funds collectively has reduced.“
Put these three things together and it adds up to a disaster for anyone who had put their eggs in the pension plan basket. Here’s an example of the devastating maths:
In 1989, a 45-year-old person saving £200 a month for 20 years until he or she was 65, would have been promised a pension pot of £206,967. This would have been expected to produce an annual income of £32,443 based on the annuity rates of the time. Today, however, the reality is that he would end up with a pension pot of less than half what he’d have expected, £101,144. This will buy him an income of a mere £7,140 a year, or just under £600 a month, at present annuity rates.
Source; Hargreaves Lansdown and Money Management.
It’s little surprise then that more and more people are realising that they’ve made the biggest mistakes of their financial lives. A survey by US insurance giant MetLife discovered that:
- with 3.6 million people due to reach retirement age in the UK in the five years, no less than one in three 55-64 year olds believe they have poured money down the drain by investing in pensions.
- more than half those surveyed said they believed they would have to continue working in retirement, either full or part time.
Why the stock market is a mug’s game
The traditional wisdom is that stocks are the most reliable long-term investment. Buy and hold, they say. The market will always come good.
Stock brokers constantly cite historical tables that argue the case. But in the short to medium term, which is the period during which many people build their retirement income, it doesn‘t always work out.
Stockbrokers always argue that - in the long run - equities always outperform bonds and other forms of investment. They point to historical data that “proves” their argument, the most common of which look at the periods from 1905 and 1926 to the present day. If you’d invested in stocks back then - the argument goes - you’d be considerably richer today.
That’s undoubtedly true. But it’s also missing the point.
To begin with, many of these analyses cover the United States stock market. During that period the stock market in other countries haven’t just dropped - they have disappeared altogether. Try telling investors in countries like Argentina and even - going back to the 1930s, Germany - that markets always come good.
Putting that argument aside, for a minute. What if they are right. No one denies that markets go through crashes and major declines. The equity fans argument is that if you stay the course you will be fine. But what if the timing of the crash means you can’t stay the course? What if holding equities becomes a bad strategy during the precise period of time that you need it to be delivering returns for your retirement? What if you are in your mid-50s and you suddenly find yourself holding stocks in a market that is heading downhill faster than an Olympic skier? What if - as has happened in the recent crash - you find yourself losing 25 to 40 per cent of the value of your retirement fund at the precise moment when you need it to start working for you? You are scuppered, to put it politely.
Take a look at the graph below, which charts the movement of equities in the past 15 years. What if your retirement coincided with one of the major dips that we’ve experienced? What if you had to cash in to buy an annuity at that point?
There are plenty of examples. If you’d started a buy and hold strategy in late 1972 and placed your entire savings in the stock market, you’d have watched the US stock market crash and lose about 40 per cent of its value. For the next three years or so you’d have been lucky to get 5 per cent per annum from your savings. If that period coincided with the beginning of your retirement, you would have been in a terrible position. The returns from your investment would have made it incredibly difficult for you to look after anything beyond your day-to-day expenses.
A lot of people think that’s the situation we are facing today. And maybe worst. The crash of 2008 and 2009 wiped up to half the value off many leading stock. No one thinks the stock market is going to return to the heady days of the early 2000s any time soon. Can you keep your retirement plans on ice while you wait for things to return to ‘normal’? Of course you can’t.
The other problem with equities is that they don’t protect you against the greatest threats to money in the long term - inflation and deflation.
Inflation is a rise in price levels that eats away at the purchasing power of your equity portfolio. Deflation is the opposite. It normally coincides with a recession or other major economic disruption, like the stagnation that hit Japan in the 1990s, and produces a broad decline in prices and asset values.
Because they are so closely linked to the general ‘economic health’ of nations, equities tend to perform really poorly during periods of inflation and deflation.
(How do most big investors hedge against such forces by the way? By investing in real assets - in particular property!)
Of course, there’s always a counter argument when it comes to stocks. At the moment it’s coming from those who are pushing investment in the so-called BRIC economies of Brazil, Russia, India and China.
In the past year or so these emerging markets have outperformed the developed world by a huge margin. The Indian, Russian and Brazilian stock markets had almost doubled their value in the past year this Summer, while China was also up. But this is clearly not going to continue. And the smart investors are warning against getting into a market that is already reckoned to be at its peak and is always subject to huge volatility.
Brian Dennehy, of adviser Dennehy Weller, says: “Emerging markets will continue to be more volatile than the developed economies. Undoubtedly, there will be a correction, but we don't know when this will happen or how deep it will be. You could easily be down 50 % within a year.”
Now that’s not a sound long-term investment.
The situation was summed up rather neatly recently by Dr Ros Altmann, one of Britain's top pensions experts and author of the Planning For Retirement report, in an interview with the Daily Mail. She said: 'The old idea that the stock market can always be relied on to deliver long term strong returns has left millions facing an impoverished old age. All investors were led to believe that, although shares might be volatile in the short term, over the long run they would deliver stronger returns than government bonds. As stock markets have collapsed, pension fund values have fallen and the result has been devastation for many pension plans. Demographically, this could hardly have happened at a worse time. The baby boomers are about to retire - reaching state pension age from about now.'
Why Gold is a ‘useless’ investment.
You’ve no doubt read about how ‘hot’ gold is right now, with investors watching the price of the precious yellow metal soaring. But have you read why the world’s most famous investor reckons it’s worse than a waste of time as a vehicle for long-term growth.
The best opinion we’ve read on why gold is a non-starter as a long-term investment came from someone who should know what he’s talking about - Warren Buffett.
The so-called Sage of Omaha - refuses to have gold as part of his huge portfolio. Why? Well, basically, because he thinks it’s useless.
In a speech back in 1998 he famously said: "(Gold) gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."
It’s an opinion that he’s stuck to throughout his long and highly successful investing career. (His Berkshire Hathaway fund, has appreciated by 140 per cent since 1998, despite the recession. So it‘s fair to say, he knows a good bet when he sees one)
Buffett’s analysis is always based on the utility and growth value of companies. He looks at company’s like Coca Cola and sees businesses that are going to deliver dividends and growing share value. When he looks at gold he sees - nothing. In 2009, when a television interviewer on CNBC asked him where he thought gold would be in five years time he said: "I have no views as to where it will be, but the one thing I can tell you is it won't do anything between now and then except look at you. . . . it's a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that."
And even in 2010 he told Fortune magazine: "You could take all the gold that's ever been mined, and it would fill a cube 67 feet in each direction. For what that's worth at current gold prices, you could buy all -- not some -- all of the farmland in the United States." Buffett said. "Plus, you could buy 10 Exxon Mobils plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?"
So take the words of the world’s greatest investor. And give gold a miss.
Oh, and if that’s not persuasive enough, then read some research by Askar Akayev, a researcher who has studied the variation in the gold price between 2003 and 2010. He is forecasting a complete collapse in gold prices sometime between April and June 2011.
What You SHOULD Do With Your Money As You Plan For Retirement
OK. So that’s what you shouldn’t be doing with your money. Equities, pensions, gold and other stock-market linked investments are out. But what’s in? Where can you safely and securely put your money in the knowledge that it’s going to grow and provide you with a decent retirement income?
Well, the answer is simple - property, and specifically, buy to let property.
Don’t Listen To Those People Who Tell You Property Is A Bad Idea
You will come across a lot of people who will tell you that buying property is the LAST thing you should be doing right now. These harbingers of doom will tell you that prices are falling (which isn’t necessarily true) and that mortgage rates are going to rise (which is true, but not if you are on a fixed rate deal!).
These people have been reading far too many scare stories. And they are also failing to see the big picture.
If you are planning for your retirement, property is by far the safest and most secure use for your capital.
Why? Well take a look at this graph.
This is what has happened to the UK property market in the last 35 years. Average house prices have gone up from around £12,000 to somewhere around £300,000. In other words, if you’d bought a house or flat in 1975, it would now be worth something like TWENTY FIVE TIMES as much. Where else are you going to get long term growth like that AND collect a decent income in the form of rent. Nowhere.
How Buy-To-Let Defied The Odds
When the banking crisis tipped the world into recession, a lot of people said that property was the investment sector that was going to get hit the worst.
And within the property world, the buy-to-let market was the one that was going to be wiped out - perhaps forever. Their logic was simple: people were overstretched, over-leveraged - it was over!
How wrong could they have been. Of the nearly 1.3 million buy to let properties on the UK market, less than 1 per cent were repossessed.
Now, as the world claws its way out of the global recession, the same old stock analysts are recommending everyone gets back into equities, gold, gilts. Everything but buy-to-let. And again, they are plain wrong.
Why Buy-to-Let Is Secretly Roaring Ahead
“Interest rates have remained low, especially to those with good ‘loan to value’ equity, solid income figures and a good repayment history. And with an 11 per cent share of the mortgage market, buy-to-let is more popular than ever.” - Source: Channel 4 News
Mortgage Brokers are at the front line when it comes to spotting trends. When things are changing they see it first.
So it’s significant that a recent report by the Mortgage Alliance (TMA) - one of the UK’s leading mortgage clubs - reported that nearly half of brokers had started receiving more buy-to-let enquiries in the past three months.
And more than half of UK brokers are feeling more positive about the future of buy-to-let, according to the TMA.
Another sure sign that there’s something going on is the fact that lenders are loosening their purse strings again. When the financial crisis hit, buy-to-let purchasers found it difficult to borrow more than 70% of a property’s value. But in the Autumn of 2010 we saw lenders beginning to offer much more attractive deals. The Nottingham building society lifted its maximum loan-to-value (LTV) from 70% to 75% and upped its maximum loan from £200,000 to £250,000 and relaxed its rental proviso. The Mortgage Works (a division of Nationwide) launched a range of buy-to-let deals at 80%.
Why would they be doing that if they didn’t think the medium to long term market was on the up?
There are at least 3 good reasons why this newfound optimism about buy-to-let has emerged.
How demand for rented accommodation is rising.
The housing market in general is stagnant. Mortgage lenders are applying much tighter rules than they have done in the past. First time buyers in particular are finding it close to impossible to get finance. But they still need somewhere to live.
As a result, the demand for rental property is on the rise. In some parts of the country, demand is out-stripping supply.
Don’t take our word for it. Here’s what the Investor’s Chronicle said in the Autumn of 2010:
“First-time buyers who are unable to get a mortgage still need a roof over their heads, and the demand for rental properties is soaring. And according to Rics, in the three months to October 2010, demand for lettings rose at its fastest rate since the fourth quarter of 2008.” - Investor’s Chronicle
That upward trend isn’t likely to change any time soon, especially when interest rates can only go up in the next few years. More and more people are going to get priced out of the housing market. And that means more and more people are going to rent.
This presents a MASSIVE opportunity for buy-to-let investors.
How rents are rising
What happens when demand out-strips supply? It’s a matter of basic economics. Prices go up. That’s what’s happening to rental levels in the UK right now. Again, you don’t have to take our word for it.
The Guardian recently reported that letting agents had seen rents rising by 0.6% to an average of £663 per month in April, 2010, 2.2% higher than a year ago.
More recently, the website rentright.co.uk reported that the average rental property commanded £1,105 a month in November 2010, compared with just £787 two years earlier: an impressive 40 per cent rise.
That trend is also going to continue on an upward graph. It has to. As interest rates begin to rise - starting in 2011 - the demand for buy-to-let property is going to track that increase. Rents will continue to go up accordingly.
How rental yields are rising
One of the key indicators professional buy-to-let landlords focus on is the ‘yield’ of a property. The yield is simply the annual rent the property commands as a percentage of its capital value.
Now as house prices have fallen and rents have risen, yields have been climbing fast. It used to be that 3 per cent or less was an acceptable yield for a buy-to-let landlord.
Today landlords are looking at yields of 6 to 8 per cent.
The media reported recently on a survey of landlords by buy-to-let mortgage provider Paragon which discovered that average yields had risen to 6.1 per cent by the end of September 2010.
Channel Four News also cited a specialist company called Spicerhaart Residential Lettings which revealed that a cross-section of its rental properties were attracting yields of 4.5 per cent to 8.5 per cent across the country.
"We are seeing a significant uplift in rental values compared with a year ago," Andrew Berry, managing director of Spicerhaart Residential Lettings, told Channel Four News. Rental yields differ around the country but provide considerably better returns at the moment than investors would see if they put their money in the bank because of low interest rates.”
How to cash in on the Buy to Let opportunity
So how do you set about capitalising on the buy-to-let opportunity that is sitting there waiting to be exploited.
The key to choosing the right property is buying a flat, apartment or house that comply to a few solid fundamentals. Make sure your buy-to-let property or properties meet these criteria, and you won’t go wrong.
Is it Desirable?
The first important rule is that you buy something that is tenantable. What does that mean, you might ask? Any property is tenantable isn’t it? Well, yes and no.
You could easily fill your portfolio with bargain basement flats and houses in rundown areas of major UK cities. You’ve read the newspaper articles. In some parts of the UK terraced houses and ex council flats are as cheap as chips. But does anyone want to live in them? The answer, sadly, is no.
There’s no point buying a buy-to-let property that isn’t going to be occupied by tenants - and occupied on a regular basis, regardless of the turnover of tenants.
If you cannot get a tenant you will need to pay for the mortgage. This could seriously affect your cashflow and could, in the worst case scenario, lead to you losing the property.
So you have to make sure that your property is a desirable place to live. How do you do that?
Well, here are a few key pointers.
1. Is the property close to major transport links? How near is the property to motorways and major road links? How far is it to the nearest international airport? If you are aiming at young, business people, for instance, this is vitally important.
2. What are the local train and bus links like? Again, this is important for working tenants who need to commute to the major conurbations.
3. What are the local shopping amenities like? Your tenants need to be able to conduct their daily life easily and conveniently. So your property needs to be within striking distance of shops, off licences and takeaways. In today’s world, people also expect to be near a major supermarket. Make sure your buy-to-let property is in the right place for all these amenities.
4. Are there good social and leisure facilities nearby? People want to be able to relax and have a good time. So it’s important that there are plenty of pubs, clubs, restaurants, cafes, gyms, health clubs and swimming pools in the area. Check this out before acquiring your buy-to-let property.
5. What are the education facilities? Your tenants may have children. So it’s important to bear in mind what the local education facilities are like. Are there good primary and secondary schools nearby? Is your property in a ‘catchment area’ that gives your tenants a helping hand in getting into those schools? (If it is, that’s a major bonus point that will make your property extremely tenantable.) Also consider the further education facilities. Are there colleges and universities nearby? If you are aiming at a more educated and wealthy tenant profile, this could be significant.
6. What is the employment situation locally? Your tenants may be people who are looking for a fresh start in life or moving because of the employment situation in their old area. So it’s important to consider whether the local economy is in good shape. Are there plenty of big or medium-sized businesses operating in the area? Is it easy to get to the centres of employment from your property? These may seem like minor considerations to you, but to your potential tenant they may be deal-breakers. So give them some thought before acquiring your buy-to-let property.
The Power of ‘Set and Forget’ Property Strategy
The best way to use property to give yourself a happy and stress free retirement is to follow a simple ‘set and forget’ property strategy.
Basicaly this means that you buy a property - or, even better, a number of properties - and then hand over the day-to-business of looking after that property or properties to a third party, normally a letting agent.
You set your mortgage payments to come out of your account each month and then leave the letting agent to look after the other side of the equation - collecting the rent, maintaining the property, carrying out the regular inspections.
While they do all the hard work, you sit back and enjoy a retirement that fulfils the fantasy that so many have seen disappear.
Conclusion – How Buy-to-Let Will Buy You The Time To Enjoy The Perfect Retirement
What’s the most precious commodity you can possess during your retirement? Most people we speak to think it boils down to two things: time and peace of mind.
Far too many people today face a retirement riddled with insecurity and anxiety. They are terrified of not being able to meet their bills, of seeing their real income shrinking and of one day seeing their pension nest egg disappear altogether.
Rather than living the dream of a contented, relaxing and fulfilling retirement, they are living the modern nightmare. They don’t have the peace of mind they deserve at the end of their working life.
And as a result of that, they can’t enjoy the time they have left in their lives.
That’s a tragedy, as far as we concerned. Especially given that - as we’ve seen in this report - there IS a way to buy yourself the time and peace of mind we all want in our retirement.
So our advice to you is very simple and straightforward:
- DON’T listen to those so-called ‘gurus’ who advise you to invest in the latest trendy stock or pile your cash into some new, emerging economy on the other side of the world.
- DON’T buy into pension schemes that promise the earth but deliver awful returns because you are being robbed of exorbitant charges or the fund is linked to a stock market that can tank at any moment.
- DO stick to the simplest and most reliable investment of all – good old bricks and mortar.
By investing in buy-to-let property and following the simple ‘set and forget’ philosophy that goes with it, you can build yourself a safe and secure financial future.
Before you know it, you will be sitting on an asset – or even better, assets – that in historic terms can only go up in value and that will deliver you an income and a yield that far outperforms anything else the financial world can offer you.
If you do that, and choose and manage your properties carefully and wisely, we can almost guarantee you a happy outcome.
And that perfect, contented retirement will no longer be a daydream – it will be a reality.