By Huw Evans, Director, Evanridge
Many business people and entrepreneurs are so focused on growing their business that the last thing they have considered is life beyond work. Not many business owners have worked out their exit strategy options and how they will ensure an income stream in years to come.
Pensions are now high on the agenda, with the Chancellor’s changes to the UK pension system now putting the power back into people's own hands. This is a huge opportunity to take back control, with a step away from tied annuities, but it also requires a shift in mind-set. Controlling your own finances should be as much a priority as your business’ P&L.
A few years ago, I got together with a couple of colleagues and decided to apply sound business sense to my own financial future and the result is now a property investment fund worth over £28 million.
Shedding light on the future
Up to now what you could do with your pension pot as you reached retirement was fairly limited. You could take 25% as a tax free lump sum but most people were then tied in to an annuity; this meant that you gave your capital to an insurance company to give you back a percentage of it every year. And when you die they stop paying you and keep the cash. When interest rates were high that was all well and good, but as interest rates have dropped so have annuity rates.
So, at 57, if I were to retire now and give £100,000 to an insurance company I could expect at best to get about £4,900 a year. It wouldn't go up with inflation and when I shuffled off this mortal coil my £4,900 would shuffle off with me and my family could kiss goodbye to my £100,000.
These rules might not seem to add up but they were put in place by a government wary of irresponsible people spending all their cash in their 60s and then coming to the state for help in their 80s.
From next year, if you are 55 and over, you will be able to take your pension pot in a single amount. You will now be able to use this money to provide an income in the best way to meet your particular financial requirements.
SIPPing the benefits and self-education
I always wanted a bit more flexibility and control over my finances, which is why I have a self-invested personal pension (SIPP). Several years ago I took full control of my investments after my stockbroker uttered the immortal words over lunch, 'I don't know Huw, where should I put my money?'
Very often the best expert on your financial capabilities and requirements is yourself. Given the opportunity that these new pension reforms offer, it may well be time to do your homework and apply your own common sense, which is exactly what I did, 7 years ago. I knew there had to be a better way to secure my financial future and two of my friends, Welsh dairy farmers Nigel Evans and Bill Ridge, seemed to think exactly like I did. Pensions, annuities and other managed investments were all high in charges, with no transparency and poor returns and the ‘investments’ we were offered all seemed more like speculation. In 2006 we took our money into our own hands and started investing for ourselves.
Bricks and mortar – concrete investments
We wanted something tangible, easy to understand and stable. Renting property to provide a reliable income stream was something we hit on early, two of us were already investors in residential property. But the UK market seemed to be overheating so we shortlisted some European countries and set off from Cardiff airport to find out more about each market.
One of the places we visited was Sweden, where we identified a market with huge demand for rented accommodation but with properties in short supply. Rents are inflation-linked and effectively set by local authorities, delivering year-on-year tangible, transparent and reliable returns protected from boom and bust. In 2006, we started investing primarily in the residential rental market.
My money, my future
Our DIY investment soon became an entrepreneurial success. Looking at our returns, friends and colleagues were keen to invest and we now run a property investment fund specialising in Sweden's residential rental market called Evanridge. Our first fund has been delivering steady returns of over 12% per annum since 2006, a successor fund is still open to qualifying investors.
Under the old rules, if my investment with Evanridge over the last 7 years had grown at 10% compounding per year, I would have been forced to give my capital away when I retired and get back less than half of what I was making on it when it was invested. That's why George Osborne's deceptively simple change in the rules grabbed my attention. What I am looking at now is a very different landscape, no tie to annuities and a very modern flexibility.
The ability to leave money in a SIPP continuing to compound is the big selling point for me. Now I will get to decide which assets to realise and when. They will continue to grow tax free while I am deciding and I will get to decide how much of my pension I need in a particular year. At Evanridge we have always been about taking control of our own financial futures and with this pension change I am delighted to see that others are free to do exactly the same.