Alternative saving options for a comfortable retirement

As the Government announces large sign-up charges for their new NEST pension plan, what alternative savings options are on the market to help prepare for a comfortable retirement?

The National Employment Savings Trust (NEST) first came into being in 2005, as a means to offer an occupational retirement scheme to more than 10m employees who were not already signed up to a pension plan. With the product due to be launched in 2012, the finer financial details are now coming into the public domain, including designs to incorporate an initial contribution fee of 2% for all new participants.

The fee has been instigated as a means to cover the financial costs of set-up, ensuring that the bill doesn’t fall into the tax-payers lap; however financial commentators have suggested that it will transform this into one of the most expensive pension options on the market today, especially for late stage, short-term savers who join in the first few years.

With the base rate remaining low, spelling small returns for ordinary savers, what are the economically viable alternatives to saving for a comfortable retirement?

High Interest Savings Accounts
Opened and managed alongside your current account, a high interest savings account offers a safe option for consumers who can make regular monthly payments for a fixed period. Interest and withdrawals will be paid and limited, respectively, to a single annual arrangement, but if you’re happy to sit on the nest egg, rather than fuss with it, these accounts can offer pretty good returns – savers can currently secure in excess of 4.5% AER. Offshore savings are also worth investigating as a high interest savings option.

Cash ISA
The start of the new financial year has signalled a mad scramble for ISA products, with many banks and building societies staying open over Easter to accommodate customers. Despite recent watchdog revelations in the media about low paying ISA’s, there are still a few choice products on the market that offer up to 5% return – plus they’re tax free.

Savings Bonds
Offering the option for savers to lock away a lump sum for a fixed period and fixed rate, Savings Bonds represent a relatively safe option for people who already have something to invest. The risk here is that whilst the cash is locked away interest rates begin to climb, yet your returns are fixed. The best options currently on the market are a little off the beaten track, so shop around for more unusual providers who may be able to offer a better rate of return.Offshore savings are also with considering.

Irish banks and your money

A guarantee on deposits can be found in your local post office – as long as you trust the Irish Government, say the Daily Telegraph.

"Royal Mail's bank accounts are backed by Bank of Ireland, which means customers will benefit from the Irish government's pledge to protect all Irish banking deposits without limit." said Rosie Murray-West.

As branches all over the country are closing like wildfire, it appears that the Irish bank guarantees could make the trusty PO the safest place to hold new savings while the recession storm blows in from across the Atlantic.

But the savings rates, some of which run as high as 7.05%, depend on the Irish banks' ability to buy sterling on the international market.

"Anglo Irish offers one of the best interest rates on Britain's high street. Its seven-day access account is paying 6.55 percent, while its instant access account is paying 6.4 percent."

"The Post Office, backed by Bank of Ireland, has a competitive 6.2 per cent cash Individual Savings Account (Isa), for those who have not yet invested their £3,600 tax-free savings limit this year, while its Instant Saver offers 5.75 per cent."

Meanwhile Kevin Mountford of Moneysupermarket.com said his website had seen three times more traffic directed towards Irish bank accounts this week than last week. "That's a reasonable barometer that people are taking this seriously," he said.

However, the Telegraph adds that British savers with British banks had not lost a penny throughout the recent problems in the banking sector, and advised them to choose their banks with regard to good interest rates rather than compensation limits.

Meanwhile, The Guardian reports that savers stand to earn negative interest on their deposits following an announcement that inflation reached 5.2% in September.

"The only way savers can be sure their money earns interest in line with inflation is to choose an inflation-linked account," says Hilary Osborne. "National Savings & Investments offers saving certificates linked to the retail prices index (RPI) - currently at 5% - but savers have to commit to locking up their cash for at least a year. Leeds building society offers a similar deal."

SIPP

It is not often that pensions are described as 'sexy' but SIPPs (self-invested personal pensions)are apparently just that. These DIY pensions that offer a wide range of investment options and the opportunity for investors to manage their own money have soared in popularity since they took off two years ago. That was largely due to the biggest shake-up of the pensions system since Lloyd George introduced the old age pension in 1908.

But while they might be seen by some as the ‘Rolls-Royces’ of pension savings, others fear they are the next big financial services mis-selling scandal in the making. They are not for everyone. Far from it: in fact many people would be better off with a traditional pension arrangement.

More than a quarter of a million people have taken out a SIPP since ‘A-Day’ ushered in an era of unprecedented flexibility in pension saving. The new rules, introduced on April 6, 2006, scrapped restrictions on how much savers could stash in their pension fund: from then, people could save up to 100 per cent of annual earnings, subject to a current cap of £235,000.

It became easier to take pension fund benefits, and the reforms also meant that, for the first time, people in company pension schemes could set up their own personal pension arrangements too. And, despite ministers performing a U-turn on allowing residential property to be held in pension funds – the most-trumpeted benefit of SIPPs prior to the introduction of the new regulations – their take-up has rocketed. SIPP sales rose almost 53 per cent to £1.16 billion in the 2007/08 tax year compared to the preceding 12 months, according to data from Hargreaves Lansdown.

“SIPPs are booming.” says Tom McPhail, head of pensions research at the independent financial services provider. “The drivers for growth are manifold: the A-Day rules allow really substantial investment contributions; the development of technology, such as online access to investment fund supermarkets, has boosted the self investment market; and competition has drive SIPP administration costs down". “At the same time, investors have become disenchanted with investment restrictions on other types of pension product and employers are beginning to appreciate that group SIPPs allow staff who have participated in maturing employee share schemes to continue to hold their shares in a tax-efficient environment.”

The past year, well-known companies such as Kingfisher (owner of B&Q), GlaxoSmithKline and Stagecoach have added group SIPPs to their benefits packages. The rise in demand shows no signs of abating. SIPPs will become increasingly prevalent as a retirement saving and income product in years to come, according to independent financial research company Defaqto.

Matt Ward, principal consultant for pensions and wealth management and author of its recent report ‘SIPPS in the UK 2008 – The Personal Pension of the Future’ says: “Since their launch in 1990, SIPPs have blossomed from a niche to a mainstream pension proposition and the attention now paid to their importance by numerous financial services institutions in the UK will ensure their market longevity.”

Like other pension products, tax relief is given on the way in, meaning it costs basic-rate taxpayers just £8,000 and higher-rate taxpayers £6,000 to invest £10,000 in their SIPP. But SIPPs notably differ from traditional personal pensions in the range of investment options. They can hold investment trusts, venture capital trusts, direct investments in stocks and shares, commercial property, exchange-traded funds, options and traded endowment policies. Come October, they should also be able to hold funds built up from contracting out of the state second pension. But different types of SIPPs offer different levels of investment flexibility.

‘Supermarket’ SIPPs, the most basic form, typically only allow investment in unit trusts and shares, but are generally low-cost. Hargreaves Lansdown’s Vantage SIPP and similar products from Alliance Trust and Killik & Co allow savers to set up and run a SIPP for free, other than fund charges.

A string of insurers also offer SIPPs, largely sold through intermediaries. Herein, however, lies the root of warnings over the potential for SIPP mis-selling. Independent financial advisers (IFAs) attract high levels of commission when consolidating pension arrangements into life office SIPPs. And, last year, the Financial Services Authority warned IFAs against recommending SIPPs – which tend to be more expensive than traditional pension products – where personal pensions were more appropriate.

SIPPs are fairly unusual among financial products in that the initial and annual management fees are usually a set number of pounds, rather than a percentage of the total fund invested. Initial fees are generally a few hundred pounds, while annual charges come in at an average £500 or so. Investment charges, generally the only charge on traditional pension products, also tend to be higher at around two per cent of the sum invested compared to 1.5 per cent or less on funds held in stakeholder pensions.

“There’s a bandwagon effect going on.” Malcolm Cuthbert, managing director of financial planning at independent financial services firm Killik & Co, said. “In the same way that people got into the tech boom, they’re now getting into SIPPs, and sometimes individuals are going from a life company personal pension to a life company hybrid SIPP, and are paying more for effectively the same investments.” Figures from Standard Life, the biggest player in the sector, show that almost 35 per cent of money invested in its SIPP (£2.78 billion out of a total £8.1 billion) was held in its own funds as of end-March.

‘Full’ SIPPs, meanwhile – offered by smaller specialist firms such as James Hay, Pointon York Sipp Solutions, Suffolk Life and AJ Bell, as well as Standard Life – give the run of the entire market. These are, again, more expensive than other types of SIPP, but can prove particularly suitable for small business owners. Up to 50 per cent of the value of assets held in the SIPP can be borrowed to buy the property, and rental income is paid gross into the fund.

The same borrowing limits apply to Axa’s recent move to allow its SIPP investors to invest in hotel rooms through specialist investment company GuestInvest. Investors can buy a hotel room on a 999-year lease and receive 50 per cent of the income on lettings throughout the year. They will also benefit from any capital appreciation on resale and the investment offers a guaranteed minimum six per cent return for the first year.

This greater flexibility clearly offered by SIPPs also extends to options at retirement: SIPPs allow people to keep their pension invested, while taking 25 per cent as tax-free cash at retirement and drawing an income.

What Factors Influence share price?

When you look at the performance of the stock market at the end of a trading day it can be hard to work out why shares have either risen or fallen in value.

Broadly speaking, share prices are influenced by news or information: new data on employment, manufacturing, directors’ dealings, political events or even the weather, all kinds of news can influence the way shares move.

You will sometimes, however, see little move in share prices when, for example, interest rates shift. This is because investors try to anticipate what is going to happen in the next few months and try to move their portfolios in or out of these stocks before the rest of the market catches on. Sometimes, of course, these expectations can be wrong and if this happen, markets can move very sharply.

If you want success in shares trading you will need to know what news other investors look at and how they will look at it. This will help you pick the best moment to buy and sell your shares. Read more about monitoring news on a company.

The Economy
The health of the global economy has a fundamental influence on share prices because it is ultimately responsible for driving company profits. Broadly speaking, if the economy is growing, company profits improve and shares will become more highly valued. If the economy is weakening, company profits will fall and share prices will go down.

Investors look at a vast amount of data to try and work out what is going to happen to the economy and shift their portfolios before the events occur. This is why you will often see markets move well ahead of an actual event occurring. You may, for example, get little reaction from the stock market when interest rates rise. This is because investors have already anticipated the shift months in advance and adjusted their portfolios beforehand.

You can usually assume that the stock market will anticipate moves in the economy by around six to nine months. So if you want to stay ahead of the game you will need to follow economic data as closely as the professionals.

The kind of information you need to play close attention to is: employment data, the reports put out by the Monetary Policy Committee (to get an idea where interest rates are headed), trade with other countries, retail sales and manufacturing. Sentiment surveys produced by trade bodies such as the Confederation of British Industry are also important indicators of where the economy is heading.

It is not only news about the UK economy that will impact on share prices. The signals coming out of other major economies, particularly the UK’s major trading partners, such as the US and Europe will affect UK shares as what happens in these economies will have an impact on our own.

When looking at economic data, you need to think not only how the wider economy will be affected but whether certain areas will be more affected than others. A rise in interest rates is, for example, often bad news for house builders as people feel less confident about taking on debt. Retailers are often badly affected too as people spend less. Pharmaceutical companies are, however, usually unaffected as people’s demand for drugs is not influenced by the state of the economy.

Companies whose profits are closely tied to the health of the economy are known as ‘cyclical’ stocks. Those businesses that aren’t too affected by the economy are called ‘defensive’ stocks. If economic conditions deteriorate you will often see investors shift from cyclical stocks to defensives


Company News
The way investors interpret news coming out of companies is also a major influence on share prices. If, for example, a company puts out a warning that business conditions are tough, shares will often drop in value. If, however, a director buys shares in the firm, it may be a signal that the company’s prospects are improving.

Companies put out a great deal of news and most of the major announcements are covered by the financial press. But some announcements not regarded as so important and sometimes, particularly among smaller firms that are monitored less by investors and financial journalists, indicators of the company’s health can be missed.

You can stay one step ahead of the game by looking carefully at all the information sent out by companies you own, their competitors and other companies you are interested in. This information is usually available on companies’ websites.

Try to think laterally about the information you are getting. If, for example, a competitor to a company you have shares in produces a revolutionary new product, it will probably hit profits at the company you own. Also think about the impact it will have on suppliers to that business. An increase in sales of mobile phones with cameras in them will not only be good for the phone company but the firms that supply the technology in the phones.

Takeovers, or even rumours of takeovers also have a big influence on prices. This is because investors expect the bidder to pay a premium to shareholders.


Analysts’ Reports
Reports produced by independent analysts also influence share prices. If an analyst changes their recommendation from ‘sell’ to ‘buy’, for example, the shares will often rise in value. Analysts’ reports are produced primarily by investment banks for professional investors, although some stockbrokers will make their research available to private investors. You may find summaries of some reports published on financial news websites or in newspapers and magazines. Some investment banks also publish their reports on their websites for free.

You should remember that the recommendation an analyst puts on a company will affect its share price very quickly and can become irrelevant within hours. This is because the analyst will usually say a stock is a ‘buy’ within a particular price range. If the price moves above their targets the improvements the analyst expects may be ‘priced in’ and so the shares not worth buying.

But analysts’ reports are always worth reading, even if the recommendation is out of date. The reports usually contain a great deal of useful information on the company and how its business is developing. They also often look at how the company rates against its competitors.


Press Recommendations
The financial pages of most national newspapers and investment magazines usually contain share tips. Like analysts’ reports these tips can have a major influence on share prices.

If a journalist recommends a share, the price will usually rise and if they write a negative story the price will fall. These moves usually happen very quickly so if you are going to follow the recommendation it often makes sense to do so as soon as possible.


Sentiment
Investor sentiment is almost impossible to predict and can be infuriating if, for example, you have bought shares in a company that you think is a good ‘buy’ but the price remains flat.

Investor sentiment is influenced by a wide variety of factors. Share prices can, for example, be flat during the summer simply because so many major investors are on holiday or attending major sporting events such as Royal Ascot and Wimbledon, hence the adage ‘sell in May and go away’.

Investor sentiment can lead to irrational buying or selling of shares and result in bull and bear markets. A bull market is when share prices rise while a bear market is when they fall. In the technology boom of the late 1990s, for example, investors paid extremely high prices for shares and ignored traditional valuation measures, such as P/E ratios. This carried on until 2000 when investors belatedly realised these shares has risen too far and resulted in a three year bear market in shares.


Technical influences
Share prices can rise and fall for a variety of technical reasons that may have nothing to do with the actual outlook for an individual company or the outlook for the market.

It is, for example, a common occurrence for share prices to drop back after a strong rally. This happens because investors take profits on some of the shares that have risen in value, protecting their gains just in case the shares start to slip back. Investors often refer to this as market consolidation.

Another technical reason for share prices to rise or fall is the quarterly adjustment in the FTSE 100™ index. Shares that are expected to enter the FTSE 100™ may experience a sharper rise than one would expect in the weeks beforehand while shares that leave the index can fall more sharply. This happens because funds that simply track the index, have to match the composition of the index. Some professional fund managers who hold the affected stocks also adjust their portfolios as they do not want their holding to be too far above or below the company’s weighting in the index.

Share prices can also be affected by investors who use technical analysis to drive their investment techniques. Technical analysis, also known as Chartism, is simply the study of past share price movements and stock market index trends, which are then used to forecast how shares and stock markets will behave in future. Read more about strategies for investment.

Marketmakers can also influence prices. If they, for example, do not own enough shares to balance their books they will have to buy more. Marketmakers also influence prices if the market is looking flat, reducing prices to attract buyers.

Hotel Room Investment

Although it's one of the strangest forms of property investment, it could just catch on. The idea is simple: you buy a hotel room on a 999-year leasehold.

Prices range from £50,000 to well over £250,000. In return, you get 52 nights a year free accommodation at the hotel; the rest of the time the hotel lets out the room on its usual terms.

You typically earn 50% of the income from occupancy, and can put it into a self-invested personal pension (SIPP), so any income and capital growth are tax-free.
Guest Invest was the first company in the UK to promote this scheme in several central London hotels.

Owner Hotel is now selling rooms in two four-star hotels in Hull and York, and is building a low-cost hotel with much smaller rooms in Hull.

Four Pillars is running the Cotswold Water Park scheme, where it is selling buy-to-let hotel rooms aimed at the tourist market. And developer Galliard Homes is building a 900-room buy-to-let hotel opposite the House of Commons in central London.

It sounds like a good alternative to investing in a flat or house in city centres, where there may be a saturated market for renting.

But there are risks. First, there is no established resale market to prove if hotel rooms appreciate over time. 'Studies in the U.S. suggest capital appreciation will mirror the mainstream housing market,' says David Galman, of Galliard Homes.

He points to a study showing hotel rooms in Manhattan rising in value by 25% over four years, and another by UK hotel analysts The Bench, predicting increases in London room rates.

Second, it may be hard for investors to get a mortgage. 'There's not much appetite among lenders for this investment, which, in the past, has been considered riskier than conventional buy-to-let,' says Melanie Bien, of Savills Private Finance, a mortgage broker. 'We have a pool of lenders, among which there used to be three willing to give mortgages on hotel rooms. Now they've withdrawn those deals.'

But Guest Invest and Owner Hotel have their own finance deals. 'We sold rooms in York and Hull in a very short time. The interest rate we offered was 4% above base rate, but still we sold well because of the high returns on offer,' explains Andy Woodcock, the developer behind Owner Hotel.

'We're now re-arranging deals at between 1.4% and 2% above base rate.'

A third danger is a possible slump in hotel usage. Although Owner Hotel offers a 10% guaranteed rental income for the first two years of ownership, the investor must then rely on the market.

If there is a global shock - another September 11, for example - leading to reduced business and tourism, then occupancy could drop dramatically.

'That's why we haven't chosen the sexiest locations such as London, Paris or New York,' says Mr Woodcock. 'We're looking at new schemes in Halifax, Gloucester, Glasgow and Bath, where we reckon there's a shortage of goodquality, mid-cost business hotels. We think these will withstand any slowdown.'

Buying a hotel room as a UK property investment may be for the brave, but this room service may well work in your favour.

Visit Guest Invest to find out more: http://www.guestinvest.com