How an overseas property backed SIPP can make a solid alternative to poor pension annuity rates

Posted on October 16, 2012 · Posted in Chris Mansfield - Blog

Chris Mansfield, Managing Director of Davenport, has recently posted in his blog head on tackling the issues affecting pension annuity rates and how overseas property investment provides a good alternative.
Pensions are becoming alarming nowadays.

Just how bad do UK pension annuity rates have to get before we take to the streets?

If you work diligently to make enough to keep the wolf from the family’s door, and a part of your financial planning for the future has been your pension, then I expect you’re probably pretty unhappy right now. Pensions are becoming alarming nowadays.

In the past your pension planning was relatively straightforward – you made contributions (either as an employee, or privately), and those contributions were invested on your behalf to create a pension fund large enough to give you a reasonable pension annuity rate on your retirement.

But that was then – and it’s all different now.

In essence, the slow down in the global economy, with the consequential negative effect on world stock markets and the resulting poor showing of stocks and shares, have forced pension annuity rates to all time lows.

Whilst this in itself is sufficiently disheartening, the even more dismal news is that there is absolutely no sign of matters improving any time soon.

The continuing uncertainty in the Eurozone is impacting very badly on annuities, with those who are on the verge of retirement now facing substantially lower pension incomes than they had (quite reasonably) expected.

The trend for annuities has been DOWN for the last 5 years.

The fact is that the overall trend for annuity rates has been negative for the last 5 years, with very steep falls since January of 2012. Yields in January would have seen an average of 2.51%, but the same annuity in August would only have yielded a paltry 2.09%.

The source of this increasingly desperate situation is gilts. Always regarded as a safe investment (because they are issued by the UK Government), they are also the benchmark for annuity pricing, and their all-time low performance has badly affected our pensions.

The difficult truth is that the yield on 15 year gilts (as published in the Financial Times on 3rd August), fell to 2.02% compared to 2.75% just 4 months ago.

And the Bank of England’s Quantitative Easing programme doesn’t help our pensions either, with its tendency to both increase inflation (thus lowering the buying power of your pension), and also to depress returns on the stock market.

Is it going to get any better?

Don’t bank on it (pun most definitely intended). There’s obviously a natural floor for pension annuity rates, which is the point where they simply repay the original capital invested.

It would appear that we are dangerously near to reaching that position. And, possibly even worse: there is no reason to believe that the situation is going to improve, either imminently or at any discernable point in the future.

The simple fact is that the global economy is attempting to deal with an incalculable amount of personal, governmental and sovereign debt, and until that debt is either repaid or written off to the satisfaction of the markets, we don’t actually have a global economy that can be relied upon in the traditional way to give us good returns. This will continue to impact on the performance of stocks and shares, which will in turn impact on annuity rates.

So – realistically – what CAN we do?

I’m afraid that the choices are essentially very stark.

For the risk-averse it is almost certain that they will have to endure pathetic rates of return on their regulated investments, equally from their savings and finally, from their pensions.

For those determined to secure a better financial future for themselves and their families, there is a growing realisation that to achieve this they must consider the alternative investments to the norm, simply because the norm is no longer performing.

So whilst the ‘High Street’ continues to languish with returns of “less than 3% pa” (that’s not my quote – it’s the FSA’s), an increasing number of UK investors are unlocking their pension funds through SIPPs, and moving their capital to overseas property investments where they can easily see returns of 15% plus pa.

An alternative in Overseas property investment

I now regularly meet with UK investors who are taking control of their pensions through a SIPP, and who are creating a better future for themselves and their family with pension values from as little as £25k – an amount which many people think is too low to do anything with, but most certainly isn’t.

What do YOU think?

I don’t THINK I’m alone in being dissatisfied with the current low level of pension returns and low pension annuity rates.

Or am I?

Do let me know if you think I’m just ranting to no avail. Equally – if you agree with me that the UK pension position is dire and needs serious alternatives – let me know that too.

I look forward to hearing from you either way.

Or maybe just see you on the barricades.