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Price and prejudice

A client has been warned that pensions are a waste of money but is property investment a viable alternative?

Ithink I should start a pension plan as I have nothing at the moment. A friend says they are a waste of time and money and that I would be better off buying property. Are pension plans worth having?

A lot of people have lost confidence in conventional methods of saving for retirement and it seems your friend is one of them. Some people base this on their personal experience while others use it as an excuse not to take any action about building up future retirement income.

The main arguments against saving with a pension plan generally revolve around cost, perceived poor investment performance and the inflexibility of access to benefits. However, I think it is fair to say that each of these perceived weaknesses can be, if not dismissed, quite reasonably defended.

It certainly used to be the case that personal pension products were expensive. Many had convoluted charging structures that were hard to understand and it seemed that whatever the consumer wanted to do with his plan, the product provider would take some kind of charge. There are still many people who have these old legacy plans and they probably need to take independent specialist advice to see if they might be better off with a more modern plan.

Modern pension plans tend to be very low cost by comparison to the old-style plans. Typically, they will have just an annual management charge which might be around 1 per cent a year. The real consumer benefit of stakeholder plans is that they have tended to drive down price.

Even self-invested personal pensions have low entry levels and costs. If you want to exercise a greater degree of control over your pension fund investments, these are well worth looking at.

Pension fund performance might be perceived as poor but it simply matches what has been going on in the investment world in general. If a pension fund invests entirely in equities and equity markets fall in value, then so does the pension fund. In the early years of this century, equity markets did suffer but they have recovered. Had a pension fund been invested in, say, commercial property, then the picture would be entirely different.

It is usually not possible to access pension fund monies before age 50 and that is going to increase to age 55 from 2010. If you are very young, then, yes, pension funds are very inflexible in this context but that does not mean that they should be excluded entirely from your savings portfolio. Some would argue that this lack of accessibility is an advantage to those who might otherwise dip into their retirement savings.

Many people lost confidence with pension savings because the device by which the pension fund is converted into income, the annuity, has also fallen in value. This is due primarily to a lower interest rate and inflation environment and improved life expectancy. However, if you are on the receiving end of lower annuity rates, of course you are going to be less than enamoured with the performance of pension savings.

All investments carry some degree of risk and property purchase is no different. Some people have done very well by structuring their retirement savings around property purchase. The capital value of residential property has risen quite significantly in the last decade or so but it is a dangerous strategy to plan your financial future around any single investment plan or a single investment asset class such as residential property.

In my experience, there is also a lot of self-delusion surrounding property as a long-term savings vehicle. Many property portfolio owners have convinced themselves that they have made a lot of profit but tend to measure this on a gross basis. The real return on property investments needs to fully take into account all costs, taxation and inflation. You only have to watch those silly TV programmes to understand that the presenters often present fuzzy mathematics in their calculation of profits.

Property is an alternative to pension plan savings but both have advantages and disadvantages. It is worth taking independent advice before you embark on either route.

Nick Bamford is managing director of Informed Choice.

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