Investment opportunities for income seekers are few and far between. Savings accounts pay next to nothing, and if you invest in government bonds, there’s a 30% chance that your investment will lose you money. For retirees, traditional annuities now pay an average of less than 3%.
Cash savings accounts – the guaranteed way to lose money
You’d be lucky to find an account paying more than 1% today. If you want to lock your money up for five years, Nationwide offers 5%. But that’s only for the first year. Oh, and only on the first £2,500. After this, you’ll receive 1%. Put £100,000 away for five years, and you’ll receive a total of around £5,250.
Your investment, including income, will be worth about £105,250 after five years. Inflation is currently running at 1.6% and is expected to rise as high as 5% later this year. If the average inflation rate remains at 1.6% during the next five years, your £100,000 investment today would need to grow to £108,260 just to be worth what it is today.
Forget the idea that investing in cash is safe – you just lost £3,010 of value in five years.
Governments are desperate for cash – reasons not to give it to them
If you’re like me, you’ll be keen to pay as little tax as possible, and pay what the right amount that's due. So, your financial advisor spends a heap of time on recommending tax-avoiding investments. Then he advises you to give your cash to the government by buying income-producing government bonds, treasuries, and gilts. “Diversify,” he’ll tell you. “Invest in a bond fund that invests in government bonds around the world.”
Perhaps your financial advisor hasn’t noticed, but a third of all government bonds now have a negative yield. What does this mean? When you invest in a bond with a negative yield, you are effectively paying a government to look after your money. With a negative yield of just 1%, a £100,000 investment today would be worth around £95,100 in five years. Oh, and in the meantime, you haven’t had any income from your investment.
Get this, too the way that bonds work if interest rates rise bond prices will fall. What they give you in one hand, they’ll take away from the other.
You’ve worked all your life and saved hard for retirement. The traditional way of creating income is to convert your pension pot into an annuity. Ten years ago, £100,000 would have got you around 7% per year. Today, the average is under 3%.
Let’s say you buy an annuity with £100,000. You’ll get £3,000 per year. After five years, you’ll have received £15,000 of income. But here’s the thing with annuities: once you’ve bought it, you can’t change your mind. When you die, the investment is gone. While you’re still living, you can’t switch your investment to a better investment opportunity.
Morale of this story is always to do your research and only trust someone that has made and lost money in the investment they are selling to you. That’s why at Offmarket all of the team at one point in their life have made and lost money in property.