We all know Britain is a nation of property lovers. But what do we know about buying and investing in commercial property?
In 2008, commercial property prices fell by an unprecedented 44 per cent almost overnight when the US sub-prime mortgage crisis hit and it’s only recently that we see prices outside of London starting to regain their lost ground.
Since the banking crisis in 2007, the market has gradually regained confidence and is becoming an increasingly attractive investment again.
Experts point out that while the price of property, in such as London, have mostly recovered, but there could still be value in the other outer areas, with good potential rental incomes and capital growth.
The commercial property market consists of shops, industrial buildings, warehouses and offices. You can typically invest directly by investing in a fund which holds actual physical property in its portfolio or by buying a property yourself, or indirectly by investing in funds exposed to property companies, developers and house builders, for example a Real Estate Investment Trust (REIT).
‘Direct’ property investment funds or trusts buy these units, whether new or existing and rent them out to other businesses on long leases, making a profit from the rental income as well as capital growth in the price of the property. This makes them popular with income seekers, as rental income typically rises in line with inflation.
Many investors invest in commercial property via a collective investment scheme. Property funds on the whole are a cheap and easy way to gain exposure to commercial property as an asset class.
Investment funds and trusts providing entry into this commercial sector are divided into two types. A traditional bricks and mortar fund will invest in the property directly and is structured as an open-ended fund or a closed-end investment trust. This fund will physically buy the property and be responsible for its maintenance and rent collection as well as having the added benefit of a regular rental income. However, as offices and warehouses are not easily bought or sold, the liquidity can be very slow. The second type is a property securities fund which invests in the shares of listed property companies and therefore is much more liquid, but is exposed to the ups and downs of the stock market.
Investors can also buy shares directly in a REIT (Real Estate Investment Trust), which runs a portfolio of properties, although this is a far less diverse way to invest as it’s just one company. Those with plenty of capital can also buy a property outright and lease it back to companies themselves, although this is without question a labour and capital-intensive, not to mention risky, way to gain access to the sector.
What to look out for
A large risk in the commercial property sector is finding tenants for empty buildings and recently we have seen the market split into two categories of property in good-quality locations, which continues to be investable and those properties in poorer, secondary locations that are often un-fundable and provide a poor return.
Property investors should be wary of three key areas: volatility, diversification and liquidity. On the upside, property funds can be less volatile than those focused on other assets, but direct property funds in particular are much less liquid because you are selling an actual property. It can be especially hard to sell when the property market is in decline. Also note that open-ended funds are particularly sticky because the fund manager has to cash in units, meaning selling property. Closed ended funds like investment trusts are more liquid because you just need to sell the shares in the trust, not the underlying assets.
Investors should ensure they take a well-diversified approach, by having a good spread of properties across retail, office and industrial. The main disadvantage of commercial property is that the location and management of the property is ‘everything’. Get this wrong and commercial property can be unforgiving. It’s also worth remembering that commercial property funds can be slightly more expensive than funds invested in other assets.
If we insure ourselves in our car, why don’t we carry the same protection for our lives when we are not in them? It’s not nice to think about personal injury or indeed death, but insurance can provide welcome protection at the most important time, however working out which type you need and can afford can be tricky.
Income Protection (IP) insurance will pay you a regular income if you are unable to workbecause of an accident or illness.
Normally, IP policies pay between half and two-thirds of your income until you return to work, reach retirement age or die. Cheaper, shorter-term policies are available, that pay out for a set period, which is typically one or two years.
How long you will have to wait to receive your payout will depend on your policy; generally the longer you wait, the cheaper it is.
What to look out for
Ensure you study the details of a policy before you sign up, because different providers have different definitions of being unable to work.
Ask your employer if they offer any kind of income protection-type benefit, which might make buying your own policy unnecessary. Remember that income protection insurance is particularly useful for freelance or selfemployed workers.
Check whether your policy covers self employed occupations, or if it is based on your ability to do a ‘suited occupation’, a similar role but not necessarily the one you’re currently in.
More generic policies will be list-based in definition, typically a list of six tasks, such as lifting a pen and getting dressed; the claimant would have to be unable to do three of them to be classified as unable to work.
Life cover actually pays out a lump sum upon your death.
There are different types of life assurance: ‘set term’ which will for a pre-determined period, or ‘whole of life’ which continues until you die, providing you pay your premiums.
Whole of life cover can be taken on an income basis too, so that when you die your family will receive a monthly amount rather than one lump sum.
What to look out for
You should put your policy in trust, which sounds complicated but in reality it’s just like filling in a form, and it means the money passes quickly to the right people in the event of your death.
Single policies are preferable to joint plans, as the cost is invariably the same and yet they offer double protection because there will be a payout on each person’s death, rather than just upon the death of the second spouse. Index-linking your policy is also worth considering: the price of your premium will rise slightly each year but so will the level of your cover.
Critical Illness Cover
This type of insurance policy pays out a lump sum in the event that you are diagnosed with one of a specified set of illnesses and conditions set out in the policy. Typically such policies cover around 30 to 40 conditions, ranging from heart attacks and cancers to less common illnesses.
What to look out for
Most critical illness policies are bought alongside life cover. Some people might be put off by Critical Illness Cover (CIC) as it tends to be more expensive than life assurance, but there is a reason for that: you’re much more likely to use it. Insurers have a waiting period of usually 21 days written into the policy, which means that if the policyholder passes away during that time, it is treated as a death claim rather than a critical illness claim.
Never think it won’t happen to me
Research suggests protection products are some of the hardest for customers to understand, but it’s important to understand that although these policies sound similar to each other, they insure against different life events and thus their suitability will depend on personal circumstances.
Before taking out any form of protection it is important to decide what type of cover you want and how much cover you will need, to ensure you don’t end up under or over-insured.
Ideally you should review your policies regularly to ensure they are appropriate for today and that they cover you to an acceptable level.
Government-backed pension scheme NEST has set out its ‘post-annuity’ approach to managing savings through retirement
Government backed pension provider NEST, the National Employment Savings Trust, has outlined radical proposals that will give savers using the scheme low-cost, flexible access to their pension cash.
It has also outlined an “automatic” process by which all savers, on reaching a series of age triggers, will be channelled into investments that both safeguard their cash to provide future income and enable savers to spend it as needed.
The plans, published recently, go some way to pave the way for NEST to become a benchmark in low-cost, flexible pension access, currently being denied to many
Also, NEST’s proposals offer a solution to the problems posed by “lifestyle” funds. As was reported these funds, which hold billions of pounds of pensioners’ savings, were built for savers who would buy annuities on fixed retirement dates, rather than, as now, a flexible retirement where cash can be drawn or invested as savers wish. As a result of this, many such funds are exposing savers to unnecessary market risk.
NEST’s research concluded that once savers finally did retire, their money should be managed in three phases linked directly to their age.
Its proposed solutions take into account factors including longer working lives, and assume most savers will have a 30 year long retirement.
NEST came into being as part of the introduction of “automatic enrolment” into workplace pensions, a policy partly based on Australian experience.
How will it affect my retirement?
The first phase envisaged by NEST is “early retirement”, spanning the decade between someone’s mid-60s and early 70s.
At this stage most savers don’t really know what kind of income they need from their retirement pots now or in the future. So it doesn’t make sense for them to lock their money up in a guaranteed income, such as an annuity. A flexible approach will suit most people best.
As a result, NEST’s default options would see the money left invested. The portfolio would be designed primarily to protect savers’ money from inflation, so the majority initially would be in shares and commercial property. But there would be two crucial additional features to this stage
Around 10 per cent of savers’ pension pot would be kept in cash as an “emergency fund” which could be accessed instantly, at little or no cost to the saver.
Secondly, a small portion of the money should be saved in a separate pot, building up a reserve which in future years can be used to provide an income.
In the second phase, when someone is in their mid-70s to early 80s, savers would continue to take a flexible income from their invested capital. But NEST recommends that the money that has been set aside for later life income should now be “locked in” to stop savers dipping into it. This provides a greater degree of security and certainty that an income will be paid for the remainder of an individual’s life.
And in the final phase, when savers reach their mid-80s and for those who live into their 90s, their money would be converted into an income stream for life through the purchase of an annuity.
NEST’s research found that buying an annuity in your 80s offers better value for money than buying one in your 60s. It also found that savers in their 80s no longer wanted to take investment risk and therefore preferred the certainty of an annuity.
Until recently buying an annuity has been the default option for millions of over 55s but in April the Government introduced new flexibilities which, in theory, mean savers are no longer forced into buying a guaranteed income. Instead, they now have unfettered access to their money as well as a wider range of options to keep their cash invested to save or spend as they like.
NEST’s vision is to create a simple, hasslefree path to pension freedom for every saver.
20 years ago this summer, Drawdown, the main alternative to an Annuity at retirement, was introduced.Tuesday, 25 August 2015 08:00
Below we look at how drawdown has become progressively more flexible and how investors can now take advantage as it enters its third decade. In the last year alone, the number of people choosing drawdown has more than doubled.
What is drawdown?
Drawdown was first introduced in the summer of 1995. Initially, it was the preserve of a minority of wealthy pension investors. Plans were expensive as it was a niche offering and advisers and pension companies were able to apply high charges for their services. A set up charge of 3% of the total fund was not unusual (which would mean £7,500 on a fund of £250,000). Self-Invested Personal Pensions (SIPPs) were in their infancy and low-cost SIPPs did not yet exist.
Over its lifetime, a new breed of drawdown has emerged with lower charges, greater flexibility and more tax breaks for passing pensions on when you die.
After taking tax-free cash, which is usually up to 25% of the pension, drawdown allows you to draw income directly from the fund, which remains invested and subject to the ups and downs of the stock market. The income can be varied to suit your requirements.
Thanks to the advent of low cost SIPPs, the cost of pension investing has come down significantly.
How is drawdown more flexible? What are the risks?
Investors can now start and manage their wn drawdown plan for themselves if they are happy to make their own investment decisions. Today managing a pension in drawdown can be as easy and convenient as other investments.
You don’t need to take any income at all if you wish, and can instead take only the tax free cash and leave the rest to grow. Income can be stopped, started, or varied as required.
However drawdown is not secure and despite the greater appeal it remains a higher risk option than a secure annuity, which will pay an income for life. It’s important to remember investment returns aren’t guaranteed. Keeping your pension invested means it could fall as well as rise in value. If you take too much out, you live longer than expected or your investments perform poorly you could run out of money.
The value of pension and the income they produce can fall as well as rise. You may get back less than you invested.
The value of your investment and the income from it can go down as well as up and you may not get back the original amount invested. Past performance is not a reliable indicator for future results. Levels, bases and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor. Please contact us for further information or if you are in any doubt as to the suitability of an investment.
With the new pension freedom rules being introduced in April 2015 savers will be able to access their pension fund at any time from the age of 55. This means, if you wanted to, you could withdraw all of your pension savings as cash, subject to tax, and then spend it in any way you wish.
The Government is passing the responsibility to the pension holder to ensure that their pension money lasts through retirement. This means the safety net of restrictions, such as having to take most of your retirement savings in the form of an income will be gone.
Industry experts are concerned that some people retiring this April may feel instantly rich, for the first time in their lives, as their pension money that was locked away becomes very accessible. There are concerns that the over 55s will go on an unstoppable spending spree.
Many people are aware there are a number of pension scammers waiting for this event to begin and this is already of big concern to pension regulators. This is expected to increase as retirees have more options for using their pension savings. These scammers are expected to target the over 55s with promises of high returns in exchange for cash from small pension pots, promising to invest in complex structures which may seem valid and trustworthy, but turn out to be non-existent follies.
How to make your pension last through retirement
1. You have to remember that your pension savings will have to see you through for 20, 30 or even 40 years. So work out the pension income you are likely to need by identifying your fixed living costs, then calculate how much you need for other essentials . This, when totalled, is the bare minimum you require, but don’t forget to factor in inflation.
2. Never go it alone, always take professional financial advice. Simple actions like withdrawing your pension in one lump sum could have significant implications such as losing a large sum in tax. Also, taking a large withdrawal and putting it into a cash savings account or trying to invest the money yourself could be highly risky without knowing all the factors.
3. Appreciate the stock market rises and falls. Factor this in by investing sensibly and making planned withdrawals, then your portfolio should continue to provide you with a reliable income. It will be important to find the right product or investment that can meet your income plan and needs, but one that is not risk loaded
4. Always have a tolerance band built into your financial plans, as they rarely come in bang on target. Unless of course you are buying an annuity, which provides a guaranteed income for life, then you are guessing your life expectancy and hoping that your money lasts your lifetime.
5. Never underestimate inflation pressures, they are there and always will be. Costs generally over time always increase.
7. If you are ever concerned or worried about a possible scam pension proposal, you can inform the Pensions Advisory Service, Action Fraud, or the FCA or speak to your financial adviser.
The value of pension and the income they produce can fall as well as rise. You may get back less than you invested.
Can you risk not being protected if you are unable to work. Here we explain how Income Protection Insurance works and what to look out for.
How would you meet your financial debts if the worse happens?
What if an illness or injury prevented you from working? The impact of you being too ill to work could have devastating consequences for your family.
Protecting your loved ones by taking out income protection insurance, which pays out if you become unable to work, could prove to be a very wise move.
What help is available?
Many of us believe the Government or our employers will help us when we are unable to work. We know the state benefits we qualify for can offer some limited help, particularly if you have a mortgage. You may even qualify for benefits like housing or carer’s allowance, but it can be a while before it is available and normally will only cover the interest on your loan.
Even if you are employed full-time, your employer will, after a period, cease paying your full salary, leaving you and your family to survive on benefits. This can be from as little as £85 per week.
How can income protection insurance help?
Income Protection is an insurance which is there as a safety net to help cover your outgoings while you are unable to work, income protection starts if you have an accident or fall ill. Payments normally begin as soon as you suffer a loss of income, through illness or an accident.
If claimed in accordance with your policy’s terms and conditions this could be within a few weeks of your accident or, if your contract states that your employer will continue paying your full salary for a set time - the payments could start when your salary payment stops. Which means you can defer payment of benefits to suit your circumstances and reduce the cost of the insurance premiums.
These premiums are also variable depending on how much income you want to receive while you are not working. You can generally choose to receive up to 75% of your salary but you will pay less if you think you can survive on 50% of your salary.
Is critical illness insurance the same?
No, Income Protection is not the same as Critical Illness Insurance. It is important to realise that Critical Illness Insurance does not replace the need for income protection cover because the benefits offered are different.
Critical illness insurance pays out a lump sum if you are diagnosed with an illness that is included on a pre-determined list. Income protection insurance, on the other hand, pays you a regular income if you are unable to work due to an illness or an injury
What is not covered?
Income Protection Insurance will not cover loss of income due to redundancy or being sacked by your employer. Illnesses that you have had in the past are also likely to be excluded, as are certain riskier professions.
You should always read the exemptions on the policy carefully. Also ensure you read the terms and conditions of the policy carefully, and make sure you understand all the definitions.
It’s never too late to review your investments. If you want your money to work hard for you and have the potential for greater returns this year, here are some tips to help
Remind yourself of your financial targets
A year can be a long time when investing, most believe that you only reach a goal that really means something to you.
Perhaps you’ve experienced some changes during the year and it’s time your investment targets reflected them? Welcoming children or grandchildren to a family can change your perspective, so it’s well worth taking some time to think about what’s important to you now.
If your situation has changed, speak with your financial adviser about how you update your targets and progress towards them this year.
Build an emergency fund,
Investments are long-term, so it’s best not to touch them even if you need cash to cover an unforeseen emergency.
To cover such emergencies, you could consider a cash reserve. Try to have at least three months of your regular outgoings in cash, which should cover most problems.
By withdrawing from cash in times of need, you keep your investments tax-efficient. If you had no other option but to take money out of your ISA, you would not be able to put it back in again if you had already reached your annual allowance of £15,000 for the 2014/15 tax year.
Think of risk and return together
Everyone needs to appreciate the link between risk and return.
Low-risk investments usually provide lower returns, whereas higher-risk investments have the potential to produce much higher returns. Generally, the longer you have to reach your goal, the less risk you take.
Charges erode your returns every year, so it’s important that you know for how long and how much you are paying and that you’re getting good service for your money. Always ask your Financial Adviser to show all the charges before you agree to have them work for you.
The risk of high charges is especially severe for older investments, such as dormant pensions. It may be more cost effective for you to transfer your dormant pensions into one pot with lower overall fees.
Always take a long-term view
Investments should be thought of as long term goals that are at least five years away. With ever changing markets, it’s over the long-term that you’ll usually see investment growth. The longer you have to invest, the better.
Regularly add more to your investments, this avoids ‘lump sum shock’ where you might invest a lump sum the day before a big drop in the market. Over time you’ll make your money back, but by regular investing, you spread the risk. Investing the same amount each month means that you’ll buy less when the market is up and units cost more, and you’ll buy more when the market is down and units cost less. Over time, you should average out at a lower cost-per-unit than if you invested in one lump sum.
Be prepared to top-up your investments
If you find yourself behind your investment target, top up your investment to bridge the shortfall.
By topping up you can keep investments on course and even help you reach your goals early. You don’t have to wait until you’re behind to top-up, you can also add funds when you have extra cash.
Make the most of tax-efficient investing
Use your annual ISA allowance of £15,000. This is tax-free saving and should be one of the first places you invest your money. You have until 5th April to use up your allowance.
Remember the ISA allowance is personal, so a couple can shelter £30,000 from the taxman. The allowance starts again on April 6th and you can’t carry over any unused amount.
As well as an ISA, you can invest up to £40,000 in your pension this tax year. Use your allowance today to get your money invested for longer.
The value of your investment and the income from it can go down as well as up and you may not get back the original amount invested. Past performance is not a reliable indicator for future results. Please contact us for further information or if you are in any doubt as to the suitability of an investment.
As of April this year, private pension wealth can be passed on to other family members, in some cases completely tax-free. This is a big opportunity for those looking to make investments for the next generation, as it opens up the concept of the pension family tree. Children or grandchildren can inherit your pension, and should you die before the age of 75 they will not pay tax on withdrawals they make from it.
Under the previous pension rules, once you had started to draw your pension, either by an annuity or income drawdown, in most cases anything paid out to your surviving beneficiaries was subject to income tax if taken as income, or a 55% flat-rate tax if taken as a lump sum. In the case of income, this could only be paid to someone financially dependent on you, like your spouse or a dependent child.
Under the new rules as of April 6th, regardless of whether you have started to draw a pension, your remaining fund can be passed on tax-free, if you die before the age of 75.
Your nominated beneficiary can use it to provide a tax-free income or a tax-free lump sum and does not need to be financially dependent on you. If you die on or after the age of 75, the beneficiary can receive the pension, but it is subject to tax at their highest marginal rate if taken as income. Pensions generally fall outside an estate, and thus are free of inheritance tax.
The Chancellor has made it possible to pass pension wealth on in a more taxefficient manner. That said tax rules can change in future and tax treatment will depend on your individual circumstances.
It is considered that the average life expectancy at the age of 65 in the UK is 86 for men and 89 for women, so the Government estimates most people will survive the age 75 threshold, and thus bring in tax receipts when they die. Pensions are governed by the lifetime allowance, which is currently set at £1.25m: anything over this is subject to a tax charge of up to 55%.
No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.
Your pension family tree
Husband dies age 74 with £500,000 in his SIPP
£500,000 passes tax free to wife
Wife inherits the pension. Withdrawals are tax free as husband died under age 75. Leaves £400,000 to pass on when she dies age 85.
£400,000 passes tax free to their two children
Two children inherit half each, which they both keep with a SIPP, so there is no tax to pay on the investment growth. Withdrawals are subject to income tax. Both children die after age 75.
Remainder passes tax free to grandchildren
Grandchildren inherit the pension with the same options as their parents. Withdrawals are subject to income tax.
How to structure and set up a pension family tree
You simply nominate who you would like the remaining pension paid to when you die (you can nominate more than one person) and you can change the nomination at any time. The nomination also applies to income drawdown, an option where you draw retirement income directly from the SIPP, but it does not apply to an annuity. The nomination is not legally binding, but it is seen as your wishes. Nominated beneficiaries and dependants can choose whether they take an income or lump sum.
This article is based on our understanding of current and draft legislation, which could change in future.
When taking benefits from a pension, 25% is usually tax-free and the rest is added to other income in that tax year and subject to income tax. For those planning to take large lump sums out, this could push income into a higher tax bracket. At the extreme, someone could instantly become a top rate taxpayer (45%).
One option to reduce tax is to spread withdrawals over a number of years. Investors - perhaps basic or non-taxpayers, might even consider taking some this tax year.
Although the new rules don’t take effect until 6 April, pensioners can already use income drawdown to take tax-free cash and some taxable withdrawals. Until April most people are restricted on the amounts they take out. From April the limits are effectively removed.
Please remember, a pension is intended to provide income for a retirement potentially lasting 20 years or more. Taking excessive withdrawals increases the risk of running out of money later and could have a significant impact on lifestyle. In income drawdown the pension fund remains invested so will rise and fall in value. It is a high risk option so will not be suitable for everyone and income is not secure. Tax treatment and pension rules will change over time and will depend on individual circumstances.
Have you ever thought “if only I could stop working”, but how could you afford it? The answer will be dependent on your pension and how well it has performed. Here we look at ways to get your pension into shape
1. Use your share of the £35 billion the taxman gives pension savers
When you put money in a personal pension the taxman also contributes. Imagine you pay in £1,000. The taxman automatically adds another £250, so your pension pot receives £1,250.
If you pay 40% or 45% rate tax, as a higher rate taxpayer you get even more.
You can claim back money through your tax return which means the £1,250 from the example above, could cost you as little as £687.50 or 55%.
The amount you get from the taxman depends on your circumstances and tax rules can and do change. So take advantage whilst it is still on offer.
2. Start a pension
It is thought that as many as four in ten British adults don’t have a pension, including 1.4 million who are within 10 years of retiring.
If you wish to retire at 65 on 65% of your salary, the rule of thumb is like this; so the calculation is like this, divide your age when you start your pension savings by two and contribute this as a percentage of your earnings. For example, if you’re 25 you should aim to save 12.5% of earnings. Obviously to retire at 55 you’ll need to save more, but the sooner you start, the less it should cost you to build a substantial pension.
3. If your employer offers you a pension at work, take it!
Some companies, especially the large ones, usually offer workplace pensions. In many cases, they pay money into your pension due to auto-enrolment which came into effect in 2012. Over the coming years all UK companies, will have to offer a pension to their employees. If you opt out, you could be missing out on ‘free money’ from your employer.
4. Check where your pension is invested
Half of the UK population have no idea where their pension fund is invested, but it is important to know because you could be missing good returns if you didn’t. Not all investments are the same and the difference could have a significant impact on your pension. That said, all investments go up and down so you may end up with less than you invested, but keeping a keen eye on it lessens risks on returns
5. Make small, regular increases
Take a person aged 30 contributing £150 net to his pension every month. If every year that person increases that amount by 5% or £7.50 a month for the first year, at age 65 he could find himself with an extra £190,642 in his pension, assuming basic tax relief and that the fund grows 4% a year after charges.
Never mind takeaways: this should pay for quite a few fine dining meals!
Meaning a little increase can go a long way in the future. however, this example is only based on today’s terms and doesn’t consider inflation which would reduce real values over time.
6. Trace old pensions
Most people have around 10 jobs during their working life and many forget or don’t keep track of all the pension schemes they have joined during their career.
If you recall joining more than one pension but don’t have the details to hand, you can trace them for free with the Pension Tracing Service.
7. Approaching retirement?
Retirement rules are changing as of April 2015. If you are 55 or over, you will have a lot more freedom and flexibility on how you can draw your private pensions. You can take lump sums (single or periodical), income (secure or flexible), or a combination, you can even take your whole pension fund as cash in one go.
However, remember the first 25% you withdraw is usually tax free, and the rest will be taxed as income.
Choosing how to draw your pension is one of the most important financial decisions you will have to make. Remember you may need it for 20, 30 or even 40 years. So ensure you find out about the new rules and opportunities available.
8. Don’t delay on your pension
It is thought that as many as 3.5 million people have no plans to stop working at all, many because they have no monetary support structure in place, but wishing they had.
What you do today could make all the difference for your future and relaxing at 55 sounds better than working hard well into your later years!
Retirement rules are changing as of April 2015. If you are 55 or over, you will have a lot more freedom and flexibility on how you can draw your private pensions
The value of pension and the income they produce can fall as well as rise. You may get back less than you invested.