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Most people dream of a sunny, stress-free retirement – preferably somewhere near the ocean. There’s no mortgage to worry about, their finances are secure and they have enough money to do as they please.
Unfortunately, for most people in the UK, this dream will never become a reality. Why? Because experts predict each of us will need at least £600,000 saved in order to live what most people would regard as a comfortable retirement.
That’s not some sensationalist attempt to shock you. The shocking truth is that there are already three million pensioners in the UK living in poverty (according to the government), or close to it, and FCA research recently revealed 15 million people in the UK aren’t saving for retirement at all. The bottom line is this: it is up to you to make your own provisions.
Let’s take a closer look at the four main asset classes that people invest in and assess the pros and cons for your retirement savings plan.
I’m not a major fan of banks and I think the entire banking system should be completely overhauled. However, savings accounts are backed by the Financial Services Compensation Scheme so are generally recognised as a safe place to keep money. That said, they are by no means infallible and are vulnerable to risks such as fraud, theft, seizure by the law, or bankruptcy to name a few.
The bad news is if your money is in a savings account then there is one thing you can depend on. Given that the rate of inflation is around 2.5 per cent, your money will be worth less next year than it is this year.
A private pension plan is probably the most common way people save for their retirements. The sad reality is that many pension schemes have performed poorly over the last 20 years - especially when compared with property.
To be honest, I’ve never understood the logic. In effect, you have to put money in each month for some unknown fund manager to invest on your behalf. You can’t access that money until you retire, nor can you leave it to your children should you die before getting a chance to spend it. At least, that was my experience when I started looking at pension options at the beginning of my career.
Pension schemes have changed somewhat since then: some money can be withdrawn tax free and there are (at least for the time being) still some tax benefits. But whenever I’ve looked at the returns they generate, and the restrictions they carry, I still believe there are better alternatives for those who are willing to take control and manage their own money.
We all know somebody who knows somebody who made a fortune on the stock market. These lucky devils do exist – but such success is a bit of a gamble, even if it does require specific knowledge and expertise. And for every winner, there are plenty of losers. If you’re not into playing the market personally, you can use third party advisors, IFAs stockbrokers or other so- called experts.
You can even put your money in a managed fund – if you are prepared to pay the fees. But research continues to show that, over time, the majority of managed funds fail to outperform a simple diversified tracker fund, that you can easily set up and manage yourself. So, if you do want to put some of your money into the stock market, a basic FTSE tracker fund may be the simplest, cheapest and possibly most profitable option.
In my view, property is the best asset class to invest in. It’s visible and tangible. And determining its value is based on straightforward variables like its location, condition and use. However, there are a few different types of property investments you can choose from.
Buy to let mortgages became readily available in 1996 and a couple of million people took advantage (including myself!) and started to invest in property as a means to build their retirement income.
Unfortunately, there been an increasing amount of red tape and financial burden placed upon amateur landlords in recent years – all of which is making it harder to turn a profit.
The UK government has decided to support the PRS (private rented sector) instead.
These large new build apartments are typically financed by institutions or very wealthy individuals, and are held long-term by pension funds. So, as an ordinary person with moderate means, are there any property investments that you can afford?
Thanks to property crowdfunding platforms, ordinary investors can now take a small slice in larger, highly profitable property investments. Returns are potentially better than buy to let investing and you don’t have all the grief that comes with managing tenants. I’m not talking about property crowdfunding, rather P2P loans secured against property.
Property crowdfunding involves buying a property as a group with lots of other investors and letting it out before an eventual sale. In theory this is great and has been a very popular product, effectively buy-to-let investing without all the hassle that comes with being a landlord.
But in the past two years we’re seeing a rising popularity in P2P loans secured against property, that pay high rates of interest for a short pre-determined period. As an investor, you can earn a highly attractive rate of typically six to ten percent per annum.
Of course, potentially higher returns do come with potentially higher risks so make sure you understand a P2P platform’s policies on things like fraud, late payments, legal charges and loans secured against residential properties, before you align yourself with them. And make sure that you choose an FCA regulated platform that is nice and transparent and outlines its small print in big letters.
You might be wondering what use a 12-month investment is for your retirement plans. And in response I’d encourage you to consider the power of compound interest. If you compound the interest you earn from short term lending, it is probably a more effective and reliable way of building up savings than any speculative capital growth you may achieve by actually buying a property.
If you keep reinvesting and adding the interest you earn to your investment each time, your savings will grow at an incredible rate. If you’re curious about the potential of compound interest, then play around with a compound calculator to get a better idea of what 30 years’ worth or reinvestment could generate!
The scary truth is, The Centre for Policy Studies believes that the government will simply not be able to afford to pay any state pension in the future. It’s therefore paramount that whichever asset class you do decide to invest in for your retirement, you do it well and most importantly, you get started sooner rather than later.
Frazer Fearnhead is CEO of The House Crowd.