Commercial Property – a safe haven or to be avoided?

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City of London at twilight- Photo by Lars P. Mathiassen

City of London at twilight- Photo by Lars P. Mathiassen

Financial markets have endured a great deal of volatility recently, reflecting growing global economic uncertainty and fears of another recession. Heightened risk aversion has translated into heavy selling of equities, with investors favouring assets perceived as safe havens, such as gold, some currency markets such as the Swiss Franc, and AAA-rated corporate bonds. Highest-quality commercial real estate has also benefited somewhat from this hasty retreat from risky assets.

Take note though that commercial real estate is by no means immune to an economic slowdown and it is important that investors remember that property investment returns are a function of economic activity. For example, if manufacturing slows down, the industrial real estate sector is hit. Alternatively, if consumer spending slows, then retail property asset returns may suffer. Consequently, valuations on these assets can fall and rents decline.

However, commercial real estate has proven to be more robust than some other asset classes in recent challenging economic conditions, supported by investors seeking income in a low growth, low interest rate environment. In the UK, for example, the income yield margin that commercial real estate offers over government and high-quality corporate bonds is close to record levels. In international markets too, property yields generally offer healthy margins over bonds, with regions as diverse as Japan and some Scandinavian markets offering the most attractive income prospects.

Property holdings should, like most asset classes, be for the long-term. The majority of my clients will have a portion of their wealth invested in property funds. Fund selection is as always the key and we can assist in recommending several property funds, both UK and Global, which can form part of your portfolio. These can include REITs (investment trusts holding and managing property) as well as Unit Trusts and OEICs) some of which invest in REITs). Right now many REITs show attractive discounts (the difference between their price and the (higher) net asset value).

As ever, make sure you get good independent advice when deciding where to put your investment wealth.

Income Withdrawal – What’s the low-down on Drawdown?

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This post deals with a few of the key points concerning drawdown contracts. A more complete analysis of drawdown vs. annuities can be found in the Honister booklet available at this link.

A recent change in the rules has allowed people to enjoy a new option: “flexible drawdown” which allows pensioners to have complete flexibility over the sums they withdraw from their drawdown contract (subject to normal income tax), provided that they can pass a new minimum income requirement (“MIR”) of £20,000 per annum from other means. So, provided that you can prove to the Revenue that you have at least £20,000 of secure annual income p.a. in retirement from alternative sources, such as a final salary pension scheme or other annuities, you may withdraw as much as you wish from your flexible drawdown plan.

The flexible drawdown MIR is a one-off test, and once it has been satisfied you do not have to prove your income again in later years.

This contrasts, however, with another amendment in regulations which serves to reduce the maximum annual sums others may withdraw from their contracts, (i.e. those who cannot meet the new MIR statement of income from other means and so are presumably more dependent on their drawdown plans). They could previously withdraw up to 120% of the government actuarial department (GAD) prescribed limit, but this has now been reduced to 100% (in simple terms, the GAD limit is close to the £ amount that one might receive from a level single life annuity). This reduced GAD limit will apply from the next review of an existing drawdown plan.

One of the things that people forget about drawdown plans is that they may be converted into an annuity at any time. So if nothing else, they can be used to defer annuity purchase, especially for younger pensioners. But perhaps their greatest advantage over annuities is that after the death of the policyholder, a surviving spouse or dependent relative may simply take over the plan and continue to run it, without any special tax charge relating to the takeover. Thus the spouse / dependent relative (who will still be subject to income tax on the income), enjoys the benefit of the plan and may themselves convert it into an annuity for themselves in the future.

This is only a snapshot covering a few key issues. Give me a call on 0845 013 6525 and I’ll be happy to discuss drawdown and annuities in the context of your own retirement planning objectives.