Pension alternatives

It has not been a vintage year for pension fund managers - or more importantly for pension savers.

Last year was the worst for funds since 1974 with an average drop of 18.1%. Data from consultants Russell/Mellon CAPS shows the total held by balanced funds fell from £36 billion to £21.5 billion. The average annual return on the funds has fallen from 11.2% in 1999 to a dismal 0.7%. As Alan Wilcock of CAPS says: "We have had an awful start to the millennium."

Figures from Legal & General show someone saving £100 a month into a pension over 20 years can expect to retire on a pension of £110 a week now. If they had been lucky enough to have retired 10 years ago they'd have got a £372 a week pension for exactly the same money. In effect it costs three times as much to save for a pension now.

It is not that much of a surprise that people are looking for alternatives. That is certainly better than not saving at all. The Association of British Insurers reckons Britons need to save around £27 billion a year extra and at least 13 million people are not saving enough for retirement.

'Safe' as houses?

You can ensure your pension is as safe as houses if you turn a house into a pension. Halifax figures show the average house cost £31,534 in 1983 - nowadays it would be worth £122,377. Turning that gain into a pension though is not straightforward. Buying a property to let out is proving popular with demand for buy-to-let mortgages climbing around 40% a year, according to UCB Home Loans. Mortgage firms will now lend up to 90% of the value of a house
which you can rent out.

Once the mortgage is paid off you should own a house which has soared in value. You can then choose to use the rental income as a pension or sell the house for a lump sum. The house sale though will be subject to capital gains tax. Experts estimate average annual returns on property investment at around 8-10% which certainly beats the stock market at the moment. But beware of problem tenants who could leave you with an empty house and no income for months to end.

You could use your own home to boost your pension. Selling up when you retire and moving to a smaller cheaper property would produce a lump sum which you can then use to buy a pension or simply live off.   You can also stay in your home and use one of the many equity release plans around.

You can even invest directly in property via property bonds. Standard Life figures show property bond yields in the past 20 years have been on average 2% more than Government bonds and 3% higher than shares. But one of the oldest rules of investment is not to put all your eggs in one basket and it is important to balance property investment with other vehicles such as shares and bonds.

Simply investing in shares and bonds is an alternative to pensions. Legal & General figures show £10,000 put into an average unit trust 25 years ago would have grown to £91,800 now. Over the long-term the stock market performs well and easily beats leaving money in a building society account.

A similar £10,000 put into a house in 1978 would be worth around £122,283, according to Legal & General. That assumes a lot of things going right and it does not take into account what happens when you sell. Houses for all that they are a good investment can sometimes be difficult to sell. And once you have sold you have to invest the money somewhere with the stock market the most obvious place. Unless it is a buy-to-let property you have to find somewhere else to live

And using the same Legal & General comparison £10,000 put into a pension will produce £112,650. That is better than the stock market and not far behind the housing market. That is because the housing market is going through a record-breaking period. That could of course change and probably will as anyone who remembers previous housing busts will testify.

Pensions still retains the advantage over other methods of saving of having tax advantages. For every £100 you invest the Government puts in £40 if you're a higher rate taxpayer and 28% if you are a basic rate taxpayer. That extra cash will add massively to your eventual pension pot.

One way to benefit from both the property market and the tax advantages of pensions is to combine the two. More investors are using stakeholder pensions as a way of paying off the mortgage on buy-to-let property. That means you enjoy the tax credits of pensions savings and can also benefit from the booming property market. In order to cash in though you need a deposit for a house and you need to be able to contribute to a pension while also funding an interest-only mortgage.

You can also improve your pension chances by picking the best company. HSBC figures show the best performers over the past year were JP MorganFleming, Newton, Halifax Life, UBS and Tilney. Over five years the best were Tilney, Threadneedle, Swiss Life, Newton and Scottish Life. The worst over the past year Glasgow Investment Managers, KBC, Royal & Sun Alliance, ISIS and Cazenove. The worst over five years were Glasgow Investment Managers, Gartmore, Aegon, Merrill Lynch and Edinburgh Fund Managers.

The bad performers will of course say they're going to get better. And that's what should happen with pension funds. Hopefully.

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