Category Archives: Money

Amberlair – the world’s first crowdsourced & crowdfunded boutique hotel

‘Boutique hotels with a reverse approach: Create an audience first, let our future guests have a say, and then comes the hotel. The Amberlair concept has the guest experience at its heart and we firmly believe it has the potential to revolutionize the way hotels are built, designed and operated.’

‘Our community of backers – who we dearly address as #boholovers, meaning boutique hotel lovers – are involved from day one, both creatively and financially. Even our name was crowdsourced, because a hundred minds work better than one.’

‘And guess what? Our community has also chosen the location of the first Amberlair in Italy. With the help of our community, we are going to develop a historic villa in Puglia, Italy, and to turn it into the perfect boutique hotel.’

The main villa at Amberlair’s Puglia property

Amberlair is the vision of Kristin Lindbergh & Marcus Orbee after several years travelling and researching, and it is fast becoming a reality.

I love travelling, especially to Italy. And I’ve taken a keen interest in the development of crowdfunding as a funding mechanism for entrepreneurs and as an opportunity for investors….as long as they are aware of the inherent risks. So digging into the unique Amberlair concept was too interesting to miss.

Kristin and Marcus have been kind enough to answer some questions about themselves,  Amberlair and Puglia….I hope you’ll find this Q&A session with them interesting:

Q. you have both spent some time touring the world, evaluating the boutique hotels market. Did you always have in mind that this was specifically to research what has become the Amberlair project, or was it a more speculative trip?

A: When we made the life-changing decision seven years ago to travel the world, we could not even imagine that the impact and inspiration would lead us to create Amberlair. On a Saturday morning in 2010, Marcus decided to quit his senior strategic planning role on the implementation of the Airbus A380 to act on a long-overdue passion. He wanted to travel the world. And because Kristin had made travel part of her life for years, lived in different countries and was working in the tourism industry, she was eager to begin a new adventure as well.

So, we packed up and began our travels for over two years and through more than 40 countries on six continents. Traveling to this extent (we became exposed to so many different cultures and lifestyles!) gave us a new perspective, and exploration fueled our creativity.

During our trip, we discovered that the most special and unique experiences were brought on by staying in smaller, independent hotels. The hip hideaways we found gave us a taste of the local culture and people. We learned how these small businesses operated, and it was so refreshing to discover that none of these owners came from a hospitality background; these hotels were driven by passion. We soon realized that we were not the only avid travellers who preferred to get a truly authentic experience through boutique hotels.

We did encounter some difficulty in our quest to find the best boutique hotels around the world. They were hard to find. In some countries, we couldn’t find a single boutique hotel. The big chain hotels and cookie cutter accommodations simply lacked the same personal and authentic touch that we loved about our favorite boutique accommodations. It was at this point that we felt the urge to do something. How could we make boutique hotels more accessible to travelers, while still tapping into the passion and knowledge that made these spots so special?

This period of travel, inspiration and discovery sparked something in us that would ultimately become the motivating factor for launching Amberlair…

Q: how did you settle on Puglia for the first Amberlair property? I think the crowd voted for this special location in the heel of Italy, but what due diligence did you do on the location first and what others were on the shortlist for the crowd to vote on?

A: Amberlair is the world’s first crowdsourced boutique hotel brand that has taken a revolutionary ‘reverse’ approach to the way hotels are built and conceptualized. First, we created our online global community of boutique hotel lovers and brand followers, establishing a relationship with them from day one to create potential lifelong guests before the hotels are even built.

We then worked with our community to crowdsource their ideas, from choosing the name of our company to the location of the first hotel and will continue to do so throughout the process, shaping the hotel’s eventual design and service amenities to create the ideal boutique hotel, designed by its future guests. Our community of supporters are typically global travellers who don’t like ‘cookie cutter’ hotels. Creative and social minds who have great ideas and strong opinions, and who are ready to put their hearts into the project. They overwhelmingly chose Italy as the location of our first hotel. They spoke and we listened, seeking out the perfect location and the perfect property to develop.

To us, Puglia had such an authentic and powerful sense of identity, much like we have seen in Ibiza, Marrakech and Tulum. It has 500 miles of coastline and the best beaches in Italy. It offers simple, yet excellent and high quality Italian food. It’s full of culture and has lots of UNESCO world heritage sites: Trulli of Alberobello, the Baroque city of Lecce, Castel del Monte, etc. It has beautiful white washed hill top towns, like Cisternino, Ostuni and Martina Franca. In 2013, Puglia was listed among the top 10 world destinations for wine tourism in Wine Enthusiast’s annual ranking. International tourism in Puglia increased by 56% from 2007 to 2014.

Image courtesy of TripSavvy

We conducted an extensive location study and deep dive into researching luxury accommodations in the area. We did this with Jan Hazelton, who is our head of development. Jan has extensive experience in hotel investments and was previously Vice President of Development in Europe for Four Seasons Hotels & Resorts. While the region has a strong demand for 4-5 star hotels, there has been a lack of true ‘boutique’ hotels, until now!

The three most popular locations on our shortlist were Spain, Italy and South Africa, with Portugal, United Kingdom, California, Iceland and the Alps also making it onto the list.

Q: how did you go about deciding which crowdsourcing & crowdfunding platforms to use? I think you’re currently raising €15,000 on Indiegogo and 6,000,000 on The Angel Investment Network? Which other platforms have you considered?

A: Crowdfunding and crowdsourcing are at the heart of the Amberlair concept. With the current equity crowdfunding campaigns on Fundable and Angel Investment Network, we are looking to raise approximately about 6 Million Euros, along with 15,000 Euros through reward based crowdfunding on Indiegogo https://igg.me/at/amberlair. There are a lot of platforms out there and we spent a long time researching the right one for our particular project. We chose these because they gave us the best distribution to potential supporters and backers, and had the most compatible infrastructure to host our campaigns.

Q: the €15,000 you’re currently raising on Indiegogo is obviously a small amount in terms of your overall funding requirements for the Puglia property. What will you use the €15,000 for, and is this as much about finding more brand ambassadors at this stage, as it is about the cash flow? 

A: The funds raised through Indiegogo will finance the architectural plans required to turn the historic villa we have found in Puglia into the perfect boutique hotel. Additionally, we have an incredibly passionate boutique hotel lover community and we hope we will attract more through our crowdfunding campaign, which will highlight our revolutionary approach to hotel development. Added to this, our equity crowdfunding offering is a very attractive investment, with the possibility to own a share of the business and asset for as little as 2,500 Euros. Investors will receive a share of the real estate asset, along with an eventual IRR of between 30-35%.

Equity crowdfunding links:

Q: I think it’s a really exciting concept to have the crowd give opinions on everything from the brand to food to room decor, but how do you anticipate this ‘democratisation’ will work in practice? How will you manage the different views of so many investors, and will you have the final say? And will you have a traditional Board structure to execute operational decisions?

A: Amberlair supporters can be involved throughout the process in order to help us create their perfect boutique hotel. Backers will be able to participate, interact, influence, back, fund or simply lay back and watch it all happen!

Our community can always suggest ideas and give  their opinions and we will try to turn as many of those ideas as possible into a reality, as long as it reflects and respects the overall history and style of the property and locale. At certain key stages of the project, we will canvas ideas and put the top suggestions out for a vote, for example, what shall we do with the large birdhouse on the estate, what shape of pool do they want, etc.?

We don’t have a board of directors, but we (Kristin and Marcus) will have the final say, along with our management team of hotel experts.

Q: In your financials, you anticipate a total of €18.8m from EU subsidies. What is the process to apply for these grants, and what contingency plans are in place for alternative funding in the event that the subsidies aren’t received, either in part or in full?

A. There are several criteria we need to meet in order to apply for the EU subsidies. Italy is not the easiest country to develop in, but we have a strong team of local architects and designers on board who have helped us to ensure that our proposed works conform to all building regulations in the local area.

We will go through the process of applying for permits from the local authorities once we have raised the funds to acquire the property, but do not anticipate there being any issues with this. We have done a feasibility study to anticipate any challenges along the way, from securing the right licences and change of use permits, to finding the right building contractor to deliver the project on time.

We are positive that we have allowed for all the possible outcomes, but guess that dealing with unexpected challenges all part of the fun of developing a hotel!

Q: I love your concept of building the audience before building the property. Do you know of comparable business models in any other sector, do you think, or do you believe your approach for Amberlair is truly innovative, in the hospitality sector at least? 

A. We haven’t come across any other projects like ours, where the community and future guests are involved in creating their perfect boutique hotel from scratch, being involved from day one in decisions like choosing our name, voting on our first location, making decisions about converting the property we have found into a hotel.

A few years ago, Marriott ran a small online digital survey asking guests to vote on three different mock-up room designs, which is the only other crowdsourcing we have seen in the hospitality sector. In 2015 Amberlair was included in World Travel Market’s annual Global Trends Report as leading the way in crowdsourced boutique hotels.

Q:  have you already begun to think about likely destinations and funding mechanisms for property #2 and property #3? How will you ensure there’s enough operational focus on the Puglia property #1, whilst also strategically planning for Amberlair’s longer term future?  

A: We owe it to our backers and supporters to get the first Amberlair property right, and that is our focus for now, but we are always looking for new growth opportunities.

Our longer-term plan is to open up to 50 hotels globally in the next 20 years. Crowdsourcing and crowdfunding are at the heart of the Amberlair concept, so we will continue to develop the company along those lines for future projects.

Thanks to Kristin & Marcus for such detailed and thoughtful answers. I wish them well with Amberlair and hope that I can get to meet them soon, and visit Puglia to see the site of the first Amberlair boutique hotel.

Crowdfunding – shark-infested waters?

I wrote a couple of months ago about my own first tentative steps into crowdfunded investments.

There is some real momentum behind this relatively new alternative finance phenomenon, technology and awareness giving entrepreneurs access to a large pool of potential individual investors.

Crowdcube is the largest platform, providing a bridge between the entrepreneur and investors. As of today, it has 283k investors on its books, and £165m has been pumped into 406 successful fund raises. It may be an unfair comparison, but Crowdcube could be considered the Tescos of equity crowdfunding, piling the deals high and selling them off cheap.

But at what price to investors…?

The Solar Cloth Company used the Crowdcube platform to raise £967k from 400 individual investors just 17 months ago. The Directors projected the business would be valued at £100m in just 3 years after the funds had been raised.

The Times has reported today that the Solar Cloth Company has just gone into administration, blaming a downturn in the solar power industry, and cuts in government subsidies.

Another significant failure with Crowdcube’s name all over the fund raising was Rebus. A claims management company, it raised £816k from 100 investors just months before it collapsed in February 2016. Investors through Crowdcube were not aware that Rebus had previously engaged a restructuring expert to advise them how to plug a cash flow chasm.

Crowdcube – and other equity crowdfunding (“ECF”) platforms – must start performing proper due diligence before listing investment opportunities. Otherwise the FCA should step in to ensure there is sufficient investor protection. The current “hurdle” – someone signing up to an ECF platform has to self-certify that they are either already a sophisticated investor, or a high net worth individual – is about as low as a limbo-dancing snake in a BHS store.

Crowdcube should also be much more transparent on their site about previous fund raises. I’d like to see a detailed summary of all businesses that have successfully completed ECF rounds, showing the timing, amount raised, key commercial milestones relative to business plan projections, any subsequent capital raising efforts….and all very clearly linkable from the Crowdcube home page.

And its failures should be even more transparent, giving investors a much louder warning that their hard-earned cash is at significant risk.

ECF is growing fast, and has the potential to be an even greater weapon in the fund raising armoury for start-up and early stage businesses. It would be a real shame if the platforms blew that opportunity.

Crowdfunding – risky business

I wrote back in November 2015 about my first tentative foray into investing through crowdfunding platform Crowdcube.

I’ve now made several small punts on the following businesses, all of whom raised funding through the Crowdcube platform:

  1. Alexi – a curated book app
  2. Vulpine – cycling apparel brand
  3. Chilango – Mexican fast food
  4. Cauli Rice – healthy food
  5. One Rebel – funky gyms
  6. Five Point Nine – coffee subscription
  7. Simply Cook – recipe kits

And one through the Syndicate Room platform:

  1. Lobster – digital photo marketplace

These are all equity crowdfunded investments. Separately, I’ve also put small amounts into a couple of crowdfunded mini-bonds, debt funding for businesses a little further along the growth curve:

  1. The Bondi Bond – a chain of Aussie style cafés (11% interest rate)
  2. Brewdog – craft beer (6.5% interest rate)

I’ve also been to investor events at Crowdcube and Syndicate Room, to meet the management teams and to network (ugh!) with other investors and some of the entrepreneurs pitching their businesses and investment opportunities.

I’m under no illusions about how risky this brave new world of crowdfunding is, as I noted in my November article. But you’d expect Crowdcube – and all the other crowdfunding platforms – to carry out a minimum level of due diligence before putting opportunities in front of investors. Especially as they’re regulated by the FCA.

But stumbling on this blog from Rob Murray Brown – fantasy equity crowdfunding – reveals some serious concerns about this brave new world of crowdfunding. It’s not surprising that he shines the brightest light on Crowdcube – the oldest and largest UK platform – which as of today claims to have raised £148.5m for 378 completed campaigns, from 267,169 investors currently registered with them.

If some of RMB’s accusations have merit, crowdfunding could be the next financial services disaster in the UK. So far, I’ve only invested small amounts that I’m prepared to lose. I hope one or two successes exceed the inevitable losses on most, and I have a bit of fun along the way, but – if I take off my rose-tinted glasses – that’s probably unlikely.

With the current levels of publicity and momentum behind crowdfunding – and historically low interest rates on traditional savings vehicles – there’s a real risk that naive investors might lose a significant proportion of their wealth.

I’m thinking about starting a separate blog myself to dig deeper into this burgeoning world, so that I can understand it better and to try and help others along the way.

What do you think? Potentially interesting and useful….or will everyone just continue to follow the crowd?

Peer Pressure

The Bank of England base rate has been fixed at its historical low of 0.5% since March 2009.

Just last week the Financial Conduct Authority, the body that regulates our financial services industry, announced plans to force traditional banks and building societies to tell savings customers when they reduce rates on accounts. Often, these dinosaur institutions attract new customers through headline-grabbing rates, but then quietly lower the rate without the same fanfare.

The FCA are calling their initiative sunlight data. Never mind the euphemism, how about fining the opportunistic banks?

Shoddy treatment indeed, with some so-called savings accounts earning as little as 0.01%.

Ever since the financial crisis of 2008, savers have been punished by governments and the traditional financial institutions looking to shore up the mess created by benign lending conditions and over-extended borrowers, in a lax regulatory environment.

So it’s no wonder that there’s an ever increasing number of Peer to Peer (“P2P”) platforms, leveraging advances in technology and leaner overhead structures to match borrowers with lenders at much better rates than being offered in the conventional markets.

Ratesetter was one of the first movers in this space, and is now reckoned to be a Unicorn, the beguiling name being given to tech start ups exceeding a valuation of $1 billion. Nice.

P2P platforms are proliferating. But if something goes wrong, you do not get protection from the FSCS, in the same way as you would if your old-fashioned High Street bank fails. Yet.

Ratesetter have benefited from their clever early differentiator, the Provision Fund, though. Anticipating lender/investor caution, they established a ring-fenced fund – currently standing at £16.48m – in the event of borrower defaults. To date a total of almost £935m has been lent through their platform, and not a single penny has been lost. That’s no guarantee you might not lose some of your money in the future, but it sure does give a measure of comfort.

My parents, both now in their 80s, are quite financially savvy but also naturally cautious and – understandably – reluctant to invest in the longer term equity market.

A few years ago, they became fed up with the risible return being earned on their life savings from the banks and building societies they had been faithful to for decades. They drip fed some of their hard-earned savings into Ratesetter, and also Zopa.  They have become increasingly comfortable with Ratesetter, and have gradually invested more in an effort to eke out a better return.

You can currently achieve 3.3% lending for 1 month through Ratesetter; 4.1% for 1 year; 4.5% for 3 years; and up to 6.1% if you’re willing to lend over 5 years. Pretty attractive rates given the base rate outlook and the curmudgeonly rates offered by banks and building societies, still beefing up their balance sheets and annual bonuses.

ArchOver is another interesting P2P option. It’s a crowdlender, lending investor funds (min. £1,000 individual investment) to established businesses (min. £100,000 borrowing), rather than individuals. Their comfort blanket to investors is multi-layered….any loan is secured by assets (the accounts receivable book of the business, for example); it’s insured; and the credit rating of the borrower must be A+ (ArchOver’s own rating system).

You can currently earn 5.5% to 9% lending through ArchOver, depending on borrowing terms and other usual variable factors.

But with all these interesting newcomers to the P2P party, how can anyone accurately assess their potential rewards relative to  the risk in using these Johnny-come-lately platforms? And how do you know who your money is actually being lent to, and what it’s being used for?

Enter my old colleague from The Motley Fool days, Neil Faulkner.

Neil Faulkner, co-founder and MD

He has set up 4thWay, a comparison and risk-ratings service, allowing you to compare rates being offered by all the main P2P platforms and – more importantly – to see an objective ratings score for each platform.

It’s more complex than I’ve just summarised, but check out the website and you’ll find the full story.

I think you’ll be hearing a lot more about 4thWay, given the emergence of P2P platforms as a viable long-term alternative finance provider for savers and investors fed up with interest rates as low as a snake’s belly.

 

Investing strategy….where next?

An economic slow down in China. The Syrian crisis. Sabre rattling from Putin. Will the UK stay in the EU, or retrench to an independent – but uncertain – future?

These macro issues and many other concerns have driven down the FTSE 100 from a peak of 7,097 in April this year to the current 6,400 level, via a drop as far as 5,899 in August.

(chart courtesy of ADVFN)

Of course there will always be volatility in stock markets, but the scale and speed of current movements seems out of the ordinary. And frankly nail-biting and stomach-churning if your life savings are fully invested in shares and funds that move largely in direct correlation with the broader market indices.

I wrote a while ago – when Gill and I stopped full-time work – about our pension position. We’ve missed out on the golden generation of final salary/defined benefit schemes. Annuities are so low that the income you can derive from them is not a viable option for us. So our pension pots – saved from our own earnings, employer contributions  and tax relief – and our other savings & investments have been at the mercy of markets and factors way outside our control.

Up until recently, all our investable assets and pension pots were placed with Hargreaves Lansdown. I’m very comfortable with HL, but I thought we needed to protect against the risk of stock markets collapsing further and for longer. We don’t have an income at present, so we need to preserve our capital.

Thanks to a friend of my brother, I was introduced to Connection Capital.  They “help clients build a portfolio of self selected,  direct investments in private equity, commercial property and alternative asset funds, as part of an organised syndicate“.

I’ve taken some funds out of HL and made some small investments in 6 separate opportunities through Connection Capital, 4 in private equity deals and 2 in commercial property.

The property investments are in long leases on assets let to a Virgin Active gym, and to a Travelodge hotel. The private equity investments are businesses in very different sectors, but they are historically profitable and have raised growth capital through CC.

These are all high risk investments, particularly the private equity businesses. But CC have a good track record and I’ve made what I hope is a balanced decision. My aspiration is that – on average – we’ll get back 2x the original investment in a time scale of 4-5 years. But with no guarantees at all on the amount or timing of any return.

More risky again are the opportunities on crowd funding platform CrowdCube. These are invariably early-stage start-up businesses looking for seed capital. Some have been trading for short periods, some are even at the pre-revenue stage, still testing products or developing technology. Few are already profitable.

I’ve made a couple of very small investments in different businesses showcased on CrowdCube. Each will have gone through some due diligence hoops before going live on the crowd funding platform, but I’m under no illusion how risky most of these opportunities are. Conversely, if they’re ultimately successful, the returns should be proportionately greater.

And then there’s the fun investment in BrewDog, the craft beer business that is taking the world by storm. I bought my shares for £950, at an already frothy valuation. I’m not expecting to make much, but with a 20% shareholder discount I’ll be able to drink myself into oblivion when all our capital has disappeared and we’re looking for the next hot meal…..

So that’s where we are, as they say on Dragon’s Den. Flying by the seat of our semi-retired pants. A decent amount of capital saved over a lifetime of hard work. But needing a reasonable income – or capital growth – to finance a standard of living that we don’t want to be forced into diminishing.

Welcome to the brave new world of pension freedoms, investment opportunities and fluctuating global stock markets.

Fasten your seat belts, it could be a bumpy ride…..

 

Investing in coffee futures

Our embrace of coffee culture continues unabated. Every High Street is dominated by The Big 3 – Costa, Starbucks & Caffe Nero – and the back streets increasingly proliferate with ever funkier artisan shops providing the perfect espresso.

I’ve succumbed to the addiction, seeking out the individual caffeine havens tucked away in the lanes of London, Paris & Australia, and anywhere else we explore. Poor Gill….she’s a tea person.

I actively avoid The Big 3, despite being a small shareholder in Costa owner Whitbread. Apart from when they emailed me a free £5 download voucher, obviously.

And now I’ve also invested in a bundle of Starbucks outlets, through a franchise operator who was the first UK franchisee and which is now looking to further expand its portfolio of home counties shops.

Yes I know, Starbucks are the work of the devil, vilified a few years ago for their minimal UK tax payments. But I’m afraid I’m not a particularly ethical investor and besides, they’ve addressed a lot of their corporate shortcomings.

I can’t see us being weaned off the caffeine addiction any time soon, and this franchisee looks like a slick operator. This is part of an attempt to de-risk our pension portfolio away from direct equities, and – if the investment goes according to plan – should result in a profitable exit a few years down the track.

So keep on ordering those skinny lattes, espresso macchiatos and flat whites. And who needs more clothes shops when you could be drinking coffee?

BrewDog – so do you feel lucky, Punk?

BrewDog only started up in 2007, north o’ the border in Fraserburgh, as a small ground-breaking craft beer brewer. Their inspiration was to be everything that the global brewing behemoths weren’t.

And blow me, they’re making amazing progress.

I’ve heard of them over the last year or so, and may even have subliminally seen some of their beers on sale somewhere, but now I’ve actually invested in their latest Punk Equity round.

Why?

For a start, the current equity raising round of up to £25m is being crowdfunded, raised by themselves rather than through a generic crowdfunding platform. And certainly not via the traditional  investment banking establishment. As a result their total costs will be only £200k, compared with a possible £1m+ if they were using the banking community. I love this way of leveraging the power of the interweb thingy.

But more importantly, from an investment appraisal perspective:

  1. they’re already profitable, with an operating profit of £3.9m and post-tax profit of £2.7m in 2014, with healthy gross & net margins
  2. the top line is growing strongly, from £18m in 2013 to £29.6m in 2014, with massive growth potential in this country and overseas
  3. the senior management team includes the founders, who are clearly passionate about the BrewDog philosophy, brand and product. They’re also heavily aligned with shareholders’ interests to succeed
  4. their beers – and increasing number of own-branded bars – sound very cool, popular and positioned to succeed where traditional pubs are failing (younger, hip nephews who have been to one of their bars agree)
  5. the prioritised list of what they’ll spend the newly raised funds on is exciting and compelling
  6. I love their energy and innovation. They feel like an early-days Virgin, or pre-corporate Ben & Jerry, genuinely wanting to stay true to their values but not afraid to chase aggressive growth. Although only time will tell, of course….

Take a look at their Prospectus. I love it. It’s persuaded me to buy 10 shares for a total investment of £475. Yes, it’s at an aggressive valuation of the business based on a heady multiple of current profitability but, what the hell, this is fun and I’m happy to just go along for the ride.

They may appear edgy and anti-establishment, but they also look very professionally managed. From their track record, from the Prospectus and within seconds of investing, I had access to my shareholder page, with great discounts on beers ordered online and in their bars, and a huge range of other mouth-watering fun benefits.

BrewDog are not quoted on any public exchange yet, but they have an annual internal market  if you ever want to exit. And there’s always the chance of an IPO, or trade sale. I’m guessing that the founders will want to keep control for a while yet though.

I’d love to have got in on an earlier round and a lower valuation, but I can see these guys conquering the world with their great products, service, brand, innovation and management.

And even if they don’t, as a shareholder I’ll get a free beer every birthday.

And who else has the chutzpah to raise money via Equity for Punks?

As with any other equity investment, there are clearly risks involved. These are listed succinctly in the Prospectus. The minimum investment in Equity for Punks IV is 2 shares @ £47.50 = £95.

Cheers, BrewDog.

 

Pension Freedom Day – and the politics of choice

Today is Pension Freedom Day. Hooray.

For decades the options for those with Defined Contribution personal pension schemes (compared with those lucky people with Defined Benefit aka Final Salary schemes) has been limited.

You could cash in your pension pot, after a lifetime of working, and buy an annuity for the rest of your natural days. You would then have a secure, fixed income. That income would be less if you wanted it to increase each year in line with inflation, or if you wanted your surviving spouse to receive a continuing proportion, for example.

There are other nuances but essentially the downsides of an annuity are that the insurance company benefits if you snuff it before the actuarial tables say you will, and the taxation implications were always punitive. Not attractive, as I wrote in an earlier article.

But from today, you have much greater choice and flexibility over your pension fund (after reaching 55).

So I give a rousing three cheers to George Osborne and this Conservative government. And I’m not ashamed to shout it from the rafters.

It’s my money. I’ve worked damned hard – well, ok, those 6 years in Bermuda weren’t all that demanding – all my working life, and I deserve the right to make my own choices about what to do with it.

Retire Sign Shows Finish Work And Message Stock Photo

In broader terms, this is a metaphor for capitalism v socialism. The political right want to decrease taxation – personal, to maximise the disposable income in your pocket each month, so that you can decide where best to spend it; corporate, to encourage businesses to invest in people and physical assets. And yes, to make a profit, which should NOT be a dirty word.

The political left believe in increasing taxation to maximise taxes because they want to spend more on public services. Because they know better than us what we need. The Nanny State.

I know which philosophy I prefer. Capitalism – with a social conscience, of course. Socialism doesn’t work, in economic terms. It scares away the wealth creators, discourages inward investment and inevitably causes a downward economic spiral.

I know how I’m voting on May 7th. But if Messrs Miliband and Balls win – with or without the help of a rainbow coalition – at least I’ll be able to buy a car with my meagre pension pot, and drive off to another country. Before they change the rules again.

 

 

 

Pensions…a momentous day @ Just Retiring

I wrote on this site recently about our pension quandary.

3d Character With Question Mark Stock Photo

Image courtesy of FreeDigitalPhotos.net

Well, today is a momentous day in the Just Retiring household….I’ve sent off an income drawdown application pack to Hargreaves Lansdown, requesting payment of the maximum 25% tax-free lump sum from my pension pot, with the rest going into income drawdown.

Why go this route?

Well, I’ve stayed clear of annuities for the reasons I spelled out in the earlier article. And I like the flexibility of income drawdown, under current rules and the new ones proposed with effect from April 2015. Despite the remaining funds in drawdown staying fully invested so the return from that pot is not guaranteed, as it would be from the annuity route.

I’ll have to adjust my investment philosophy a little to rebalance my risk outlook, and also try not to get too emotionally involved with daily market fluctuations. Which is not easy when you’re worried that you’ll run out of money before you shuffle off your mortal coil…..

But the main short-term benefit is taking the 25% tax-free lump sum from my hard-earned pension pot. Come next May, who knows what a political football that could become…it’s potentially an easy target for certain political parties.

Retire Sign Shows Finish Work And Message Stock Photo

Image courtesy of FreeDigitalPhotos.net

Gill and I don’t know yet whether we’ll be working again after our current sabbaticals. We’ll see how long we can survive on the tax-free lump sum I’m about to get from my pension fund, and pray that UK politics and global economics don’t start nibbling – or worse, gobbling – away at the shiny new income drawdown pot.

Retirement is like a long vacation in Las Vegas. The goal is to enjoy it the fullest, but not so fully that you run out of money. Jonathan Clements

Cartoon Businessman Step On Stack Of Coin Stock Photo

 

Pensions….how much is enough?

So here’s the deal….

I’m 57. Gill’s 52. We’re on a break. No, not on a Ross & Rachel Friends break. A work break. Early retirement. A hiatus. A mature gap year.

And that’s the thing…we’re not really sure ourselves yet how long this intermission might last.

How come?

Pensions. How the *&^% do we know if we’ve got enough to get us through however long we need to get through, in the lifestyle and financial comfort that we’d like to get through it in?

We’ve been lucky – and sensible – enough to stash away some savings in a tax-efficient SIPP for the last 15 years, alongside paying off the mortgage. Largely thanks to what I earned and learned working for The Motley Fool and lovemoney.com, Gill’s hard work building up South Minster Kitchens, and using Hargreaves Lansdown’s excellent guidance and online platform to manage our pension savings. And not having children made a huge financial difference. And being teetotal and never going out, obviously.

Until fairly recently, your pension choices were limited, but clearer. Work until 65 for men, 60 for women. Start collecting your state pension from the Post Office every week (along with those really nice mint humbugs), and additionally – if you were lucky – get a monthly, fixed pension from where you worked for 40 years. And oh yes, it probably increased every year automatically, in line with inflation. And that occupational pension scheme income would probably have been a function of your final salary before retirement, rather than a measure of  how much your actual contributions ( personal and employer) had grown to. Not that I’m bitter, or anything.

Ah, how simple things were. Like having only 3 or 4 TV channels to choose from. Or deciding whether to go for a bottle of Liebfraumilch, or that exciting new slightly fizzy Lambrusco wine.

The recent changes to pensions have added flexibility and complexity to that simple – but outdated – view of pensions in retirement. And the further changes proposed by the current government to take effect in April 2015 will provide even more flexibility.

But here’s the quandary Gill and I have to wrestle with now…

  • we’ve got a defined contribution (aka money purchase) pension pot
  • we just missed out on the defined benefit (aka final salary) pension scheme era, giving a decent fixed inflation-linked income for life and certainty over your financial future in retirement
  • I won’t start collecting my state pension until 2023, when I’m 66. Gill will have to wait even longer, until 2029, when she’s 67.  And there’s every chance the dates will be pushed back even further before we get there. If we get there…
  • I’m over 55 so I can take 25% out of my own pension pot now, free of tax. Very nice, but without a current income for either of us that one-off lump sum will have to put food on the table, pay the council tax, and finance any of the fun stuff that we’d like to do while we decide what to do with the rest of our ageing lives
  • we could take an annuity from our current private pension pots. But because of  the prevailing global financial position and interest rate environment, annuity rates have been running at, or near, historic lows
  • for £100,000 saved in a defined contribution pension pot, I’d get roughly £400 a month or £4,800 a year, if I were to swap the remainder of my pension pot for an annuity now – ie an annual return of 4.8%, before tax. And that’s NOT inflation proofed and Gill would get NOTHING after I’ve popped my slightly older clogs
  • it gets worse. I’d only get an annuity income of around £200 a month or £2,400 a year now for £100,000 of pension savings – ie 2.4% return before tax, if I want to protect against the risk of inflation eroding my income and ensure Gill gets 50% of that meagre annuity income once I’ve snuffed it
  • so simplistically that would mean I would have to stick around a long time to make sure I got my money back from the annuity provider to whom I “sold” the pension pot

The only advantage of an annuity that I can see at these levels of return is certainty. You’ll know exactly what your income is for as long as you stay above ground.

Fortunately there is now an alternative. It’s called income drawdown. How does it work?

  • you leave your defined contribution/money purchase pension funds invested, without buying a fixed income annuity
  • you can take out a flexible income, based on what you need and subject at the moment to certain statutory limits (to make sure you don’t spend it all too quickly on fripperies and throw yourself on the mercy of the state too soon…but these restrictions could be lifted next April, and you would then be able to spend the lot on fripperies  and throw yourself on the mercy of the state)
  • the main risk of going into income drawdown is that your pension pot remains invested, so it is subject to market fluctuations – depending how you decide to leave it invested – and your income is not guaranteed

The other great unknown for an income drawdown pension is life expectancy. How long have you got left? The current risk adjusted life expectancy for me is 84, so let’s say another 27 years…..possibly more if I stay really fit and cut out that regular Friday night curry. And let’s say Gill lives to 86, that’s another 34 years for her…maybe closer to 40 if she’s anything like her Nan.

Can we really eke out our current pension pots for that long?

Despite the risks, I think I still find the income drawdown route more attractive than taking out an annuity. It puts quite a burden on you to make the right investment decisions, and not spend beyond your pensioned means, but at least it’s flexible and largely in your control. It is your hard-earned money, after all, and the current government’s attempts to recognise that are to be applauded.

I’ve highlighted some of the decision-making quandaries above, but I’ve still only really scratched the surface of things to think about in making such an important decision.

Why not take a mixture of guaranteed annuity and flexible drawdown income? What are all the other tax considerations, based on current legislation and also after the proposed changes due in April 2015? And what happens to our remaining pension pots, once we’ve both shuffled off our mortal coils, in any of these very different scenarios?

And there’s much, much more to ponder…but the greatest unknown remains the question of life expectancy. How galling would it be for us both to kick the bucket in 5 years time – tragically both crashing on the rocks during a cliff diving competition in Mexico – having taken out an annuity, so that the insurance company enjoys the fruits of our long labours more than we have?

Or if we go the income drawdown route and, thanks to healthy Madonna-like macrobiotic diets and staying fitter than a bunch of butchers’ dogs, both get telegrams from King William….but have run out of pension pot dosh at some time in our energetic 90s?

And there’s the rub. There are just too many variables to be able to make an absolutely correct decision NOW. Unless of course, you know that you’re definitely going to fall off your perch at 9 o’clock on Saturday night, just after Strictly, on 24th October 2026. Then you can really plan ahead, and cut your pension cloth accordingly.

I’ll write again on this mystical subject of pensions and let you know which options we follow, but for now I hope this article has at least highlighted some of the considerations we – and others – face approaching those allegedly golden years of retirement….

“You can always alter and adapt your plan….provided you have one.”
Manoj Arora, From the Rat Race to Financial Freedom