February 19, 2021

His retirement looks bright. He has a financial plan. Do you?

Savers warned to ’wise up’ and make plans NOW. Pensions are not enough to live on in later life, experts warn

Nearly six years after the Pension Freedoms were introduced, a new study has revealed that the nation is in danger of sleepwalking into retirement.

Key findings:

  • Many people are burying their heads in the sand when it comes to retirement planning
  • Savers need to consider a dual approach to retirement and forget relying on a state pension
  • Savers should consider property investment as a solution to their long term financial requirements.

An exhaustive study conducted by the People’s Pension, a workplace savings firm, has worryingly revealed that many savers are ill informed about their pensions and the majority are on track to run their pension dry in retirement.

The problems start with financial basics, such as savers putting off planning for the future as they ’fear the truth” with just one in ten making detailed financial plans. The research found savers were often too scared to check their pension pots, as well as significantly underestimating how long they will live. None of the savers in the study estimated they will live to age 100 and beyond’ despite current forecasts suggesting one in ten 65-year-olds will do so.

The Pension Freedoms of 2015 gave savers the choice to do what they wanted with their pension pots from the age of 55. Whilst historically most would have used their pots to buy an annuity’ providing them with a guaranteed income for the rest of their lives. Now, most retirees choose to keep their pension money invested and draw down an income. With experts recommending a withdrawal of no more than 4 per cent per year. The success of this strategy is dependent on the savers ability to invest their funds efficiently and to not draw down too much, as the retiree could quickly deplete their pot.

The freedom for individuals to manage their own retirement wealth has resulted in a trend for savers to ’go it alone’ in a bid to avoid the fees charged for financial advice and continued fund management. This is somewhat understandable as advice on a drawdown pension plan will, on average, be charged at 2.4 per cent of the amount invested– with a fund management fee 0.8 per cent per year from then on. Meaning a saver with a £100,000 pot could potentially lose thousands to fees.

Regrettably, the report reveals that opting to go it alone, when it comes to financial advice, means most are likely to make ill-advised investment choices and take money out too quickly’ and consequently most will be solely reliant on a state pension by their mid-80s.

So, what is the alternative?

At Prosperity, we believe property investment offers the best means of supplementing pension income in retirement. We are not alone in thinking this, as according to the Office of National Statistics– 29% of people believe that property is the safest way to save for retirement. Property investment offers the relative certainty of stable monthly income, which is exactly what many savers need to complement their pension holdings and ensure they do not lean too heavily on pension draw downs. The bricks and mortar approach to investment has proven increasingly popular in recent years and there are currently 2.7 million buy-to-let landlords in the UK.

A combination of buy-to-let holdings and prudently managed pension savings can be the perfect mix to provide a comfortable retirement. Sadly, many savers comes to this realisation too late. Following the Pension Freedoms savers are now free to withdraw lump sums from their pension pot, with many opting to acquire investment property.  There are two drawback to this. Firstly, whilst the first 25% can be extracted tax free, the rest will unfortunately be taxed. Secondly, there is also a question of timing– as savers can only withdraw from their pension pot after the age of 55. This limits the timelines of a buy-to-let mortgage and may force them to buy ’cash’, a capital intensive move. Prosperity Wealth has a solution to these challenges, one that enables savers and investors to plan for retirement by establishing a property portfolio.

Prosperity offers a number of unique payment plans that enable clients to build a deposit during the construction of the property. This means buyers do not require lump sums and can opt to save towards a deposit in a structured and comfortable manner. Prosperity have also established a fully managed hands-off service that means buyers can simply enjoy the income without any time demands of property ownership. Thus enabling a happy and stress free retirement.

With many savers sleep walking into retirement we believe that long term planning is crucial. Prosperity encourages clients to assess their current financial situation– income, outgoings, savings plans– and set clear goals which are then broken into a monthly strategy. Investing in property as soon as you can means that you have a dual income whilst you save, regular monthly income that rises with inflation, and the strong possibility of capital gains as house prices continue to rise.