The 3+1 Plan in action as a retirement income plan
If you’re like most people in the UK today, your retirement income options will be limited. According to a poll of 100 MPs in 2014, almost 20% believe that the state pension will be extinct in 30 years. When this does happen, most people will be reliant on their stakeholder pensions. Some may have what they were promised would be valuable personal pensions. The lucky few will benefit from rental income from investment properties.
In this post, I’ll look at how stakeholder and personal pensions work and what retirement income options they allow. I’ll also look at how property investment stacks up against this. You’ll be able to make a more informed decision as to how to plan for your retirement.
Pensions – the basics
There are a lot of similarities between personal pensions and stakeholder pensions:
- Both get tax relief on contributions
- The pension funds grow mostly tax-free
- You’ll pay management charges on those funds
- You can withdraw a tax-free lump sum of 25% of your fund when you retire
- The balance of the funds is used to pay pension income
A stakeholder pension is the new compulsory pension scheme run by your employer. You have to pay a certain amount into the scheme. This minimum is rising to 2.4% of your gross earnings after 2019. Your employer will also pay into the scheme. Its minimum payment will be 2% after 2019. And you’ll get tax relief on contributions, too. The net effect is that you’ll be making or receiving stakeholder pension contributions of 5% of gross salary after 2019.
How much do you need in retirement?
Only you can answer this question. However, based on the 2015 Scottish Widows Retirement Report the average income that people think they will need when they retire is £23,469.
The number one of retirement income options recommended by financial advisors and pensions firms is to withdraw 4% of your pension pot every year in retirement. That way, your funds should last the rest of your life. There’s no guarantee, of course.
To get that £23,469 income needed, your pension pot would have to be £586,725.
Do you think that saving 5% of your salary each year will create a pension pot this size? The fact is that if you’re saving in a personal pension fund or stakeholder fund, you need to save as much as possible towards your retirement. The earlier you start, the less you’ll have to contribute. As a general rule, for a reasonable retirement you should:
Halve the age at which you start contributing to a pension plan. Save this percentage of your gross salary every year until you retire.
Simply put, if you’re 30 years old now and are about to start saving for retirement, you should be putting away 15% of your gross salary every year.
What if you invested in property – what retirement income options would you have?
I was recently talking to a client (Simon) who started investing in property around 20 years ago when he was in his mid-forties.
At the time he was earning £18,000 per year and had done next to no pension saving. He decided that he would save 5% of his salary towards his retirement. Instead of a traditional pension, he decided to invest in residential property instead.
Simon bought his first buy-to-let property with a mortgage of £40,000. The mortgage cost him £3,200 per year, which was covered by the rent. Although the costs of property management and other expenses tipped him a little into the red, he had allowed for this in his cash flow – it was costing him way less than the 5% he had intended to save.
Over the following few years, interest rates went down. Property prices rose. So did rental prices. It wasn’t long before his investment property was cash flow positive. He didn't have to save any of his salary − his pension pot was paying for itself.
He decided to release some equity and buy a second buy-to-let property. A few years ago he repeated a third time.
Simon is about to retire
Simon now owns three investment properties. The mortgage on his own home has been repaid. His salary at work gives him a take-home wage of £1,800 per month.
His three rental properties produce a gross income of £3,200 per month. They’re worth a total or around £600,000, and he has mortgages totalling £190,000 secured on them. After all his expenses, property management charges, and mortgage interest payments, Simon is left with around £21,000 gross income.
For the last five years, he’s been saving all his net rental income into an ISA. He’s got over £50,000 in a cash ISA account.
Simon’s giving up work next month. He doesn’t have to rely on the state pension (though he’ll benefit from that too when he gets it in a couple of years).
The net rental income from his properties is £1,750 per month. That income will rise every year as he increases rents at their annual review.
He’s taking a few thousand pounds of his cash and treating his whole family to a holiday in Disneyland − children and grandchildren included.
How did he achieve this, in just 20 years? He followed the 3+1 Plan. He prepared himself for the initial cost of investing in property and took the plunge with £20,000 of his own savings. Apart from that original cash, Simon’s buy-to-let property investments have paid for themselves.
Now he’s retiring on a stable and growing income that replaces his entire salary from work.
Contact the team at Gladfish today on +44 207 923 6100 and find out how residential investment property could transform your retirement planning.