Research by Dunstan Thomas suggests those who seek advice at retirement can hope to be two-thirds better off than those who choose to invest the funds themselves.
In a move to adapt to the changing drawdown landscape, Aegon has launched a new pension fund with a risk rating of 1.
Since the reforms came into effect in April, there has been a large surge of people selecting drawdown over annuities. Many of these people aren’t suited or have no experience of investment, however want drawdown for the flexibility it offers. Aegon is the latest provider to try and cater for type of retiree after a flurry of activity in the Guaranteed Drawdown market.
Aegon has designed the fund to be very low risk and I aimed at investors who prefer to have a preservation of assets rather than chasing high returns. It’s a fund which hopes to improve on cash rates but try and protect the downside.
A retree who wants to take advantage of income drawdown is largely faced with a decision expose their pension to stock markets. If there isn’t an appetite for this level of risk, or there’s no experience of investments, this type of fund could well offer an alternative.
“Many pension savers approaching retirement do not want to lose money. Retiready’s Stability fund is designed to minimise market losses while retaining potential for growth above inflation” Said Nick Dixon, investment director at Aegon.
So the pension freedoms are finally here and you now have unlimited access to your pension monies. There has been a lot of talk about pensioners being irresponsible with their fund buying cars like the ridiculously priced Lamborghini. But what about the vast majority who are going to be responsible and either purchase one of the pension income products available or look for alternative investment vehicles to produce an income.
A much talked about option is to purchase a buy to let (BTL) property to provide an additional source of income. A BTL property could provide capital growth and a steady form of income to complement either a private or state pension.
Global index firm MSCI predict a significant rise in those reaching retirement venturing into the residential property market. The market has effectively found a new wave of budding investors with any over the age of 55 having access to large savings pots. There is speculation that this will bring a new influx of products to market in order to cater for the pensioner pound.
Certainly there are investment funds which invest in property, albeit largely commercial property, but there is a certain amount of comfort owning a more tangible asset. If you can touch and feel the bricks and mortar there is a feeling of more control.
There was a Buy to let property boom in the times before the latest financial crisis. Access to cheap easy money, with little or no deposit, and fuelled by the media fascination of property investment meant a surge in BTL landlords. The credit crunch and drying up of available mortgage loans quickly put a stop to it however. The last 7 years have seen banks be a lot more cautious with lending and as a result, preventing first time buyers getting on the property ladder. As a result renting has become the norm, yields have been creeping up and provided a real opportunity of good returns.
All this plays into the hands of pensioners with access to large cash deposits. Just this week a survey by the Bank of Ireland suggest as much as 42 per cent of those reaching retirement may consider a buy to let property.
So is it a good investment? Well as with any investment there are considerations and risks. The first is on the withdrawal of pension funds. The first 25% is tax free but any remaining withdrawal is added to the retiree’s income tax bill. This could mean 20 per cent or even 40 per cent is lost to the tax man. A withdrawal of £100,000 would see £25,000 not subject to tax but a total of £19,400 paid in tax on the remaining 75 per cent. This would leave a net fund of around £80,600 (using a 65 year old, allowing for the personal allowance of £10,600 and no other income). There is an instant 20% loss on withdrawing funds in the manor.
Other considerations are the initial costs of purchasing a property, solicitors, estate agent and mortgage loan fees if you’re taking a mortgage out.
The rental yield also isn’t guaranteed and periods of none tenancy could see mortgage bills stack up.
Typical deposits for a buy to let are 25% but the more you can put down the less reliant you are on a tenant to pay the mortgage.
House prices have plat owed in the last few months so don’t expect any significant rises in value in the short term. The bounce in property prices from the financial crisis is all but over and as with stock market investment, a buy to let should be seen as a medium to long term venture.
Pension Freedom on April 6 is only a month away now, and the major drawdown providers are starting to show their card in a bid to take their slice of the drawdown funds extravaganza.
Standard Life today announced they are removing their £208, one off set up charge and scrapping their £312 early depletion charge. A few weeks ago Hargreaves Lansdown removed their set up charge and offered drawdown for 0.45 per cent as an ongoing fund charge. Alliance trust is also withdrawing their £250 set up fee and choosing to charge an annual fee of £276 for all drawdown customers regardless of fund size.
The race is on to offer the most attractive drawdown proposition and secure the expected flood of funds in April. Since the March 2014 budget it’s widely been reported that people who once considered an annuity are now thinking about income drawdown as a means to take pension benefits. According to the ABI, sales of annuities have fallen by more than a third whilst the take up of income drawdown continues to gather pace. Standard Life expect a 5 fold increase in demand for drawdown.
Platform charges have been opaque for years with no real way of assessing the advantages of one over another. Some providers charge on a percentage of funds held. Others charge a one off fee per year and a number offer discounts on their funds based on assets held. It seems providers are now waking up to the need to simplify product charges in anticipation of a new wave of potential customers. Customers who want a simple way to compare one product against another. Annuities allowed this, they were quite black and white regarding who was best. The highest offer of income won. Drawdown providers need to appeal to those retirees who don’t have a maths degree and are not financially savvy. The recent announcements regarding simplification of fund charge from those companies mentioned is a step in the right direction.
So from April 2015, you’ll be allowed to access your full pension pot and buy that Lamborghini you’ve always been after. You’ll be able to race down to the bowls club with
your friends and laugh in the face of those using their free bus pass. But what are the actual costs of running one of these machines.
According to Autocar the Lamborghini will set you back £260,040 of your hard earned cash. If you’re 65 and have no other earning (let say you defer the state pension), you wouldn’t have much change from your £450,000 pension fund after tax.
|Total Income Tax||£188,627.00|
Net Pension left £261,373
Running around in Miss Moss will take its toll on her shoes and the replacement tyre bill will cost around £3,500 to keep her stuck to the road.
With a top speed of 217 miles an hour you’ll have no excuse handing in your tax return late. Being retired however the cost of your petrol won’t be tax deductible. The Lambo does 17.66 mpg so the cost of a conservative outing from London to Manchester will set you back £67 according to Journeyprice.co.uk or £2,416 per year over 7500 miles . Such a beautiful car requires beautiful attention though and if this was a high maintenance date you’d be taking out Kate Moss. The engine requires a service every 7,500 miles so a 2 year service bill will cost you around £10,000. I’m not sure your trusted local mechanic would be qualified to touch this.
Insurance is going to cost you in the region of £3,617 per annum according to moneysupermarket if you agree to keep the miles down to our 7500 example. That’s taking into consideration your 45 years no claims bonus!
Oil changes are around £200 and a set of break pad will set you back about £310 and when you finally ditch it in two years time the depreciation will set you back about £35,000 on resale.
Still thinking you want that Lamborghini?