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Investor Views: “I Bought a Holiday Cottage with my Pension”

Private investor Colin Aves says he hopes a combination of property and pensions will provide for him in retirement

Emma Simon 14 September, 2016 | 11:48AM

Colin Aves says he is making the most of the new pension freedoms. He has used part of his pension to buy a holiday home near Swanage in Dorset, which he hopes to rent out for additional income for part of the year.

“It’s something that myself and my wife Nicky had talked about doing for a long while, but financially we weren’t in a position to be able to do anything about it before.”

Aves, who works as a structural engineer, is now 58. As he is older than 55 he can access some of his pension funds, although part of his pension is in a final salary scheme, which he can’t touch. The couple decided to use some of this money to put down a deposit on a second home.

They bought ahead of the change of stamp duty rules, which raised this tax on second homes.

Aves knows there are concerns about baby-boomers like himself spending their retirement saving, then not have enough income when they are older.

But adds: “I am in the fortunate position of having a couple of generously funded pension schemes. In addition, we’re mortgage-free in our current property.”

Although he hopes this will prove to be a sound financial investment in the long run he says the primary reason for buying was to spend time there with the family. He says: “We hope to get some rental income from it, but this hasn’t been our main consideration.”

Over the longer term Aves hopes to see the property’s value increase: “If we need more funds later in life there is always the option to sell. In our experience property has proved to be a solid investment. We’ve moved house a number of times and I helped both my children get a foot on the housing ladder.

“Generally we have tried to buy properties we can improve; this has led to bigger gains. I usually do this work myself, or will know people who can undertake more specialist work.”

Diversification is Key

But although Aves says he likes property as an investment he is careful not to put all his eggs in one basket. He says: “I have a good pension from a previous employer. This will pay out an income when I reach my 60th birthday. Hopefully at that point I’ll try to reduce the hours I work, and spend a bit more time in Dorset.”

Aves has been contributing to a SIPP for around a decade. “At the time I took out a SIPP because I thought would be able to use it to invest in residential property, but this option was removed.” Gordon Brown, when he was Chancellor ditched planned changes to allow to SIPPs to invest in residential or buy-to-lets in his 2005 ‘pre-Budget’ statement.

However, Aves says he had continued to invest in his SIPP on a regular basis. “I get the tax relief, and the funds have performed reasonably well on the whole. It’s one of these things I look at once a year at best, and might switch a couple of investments, but it basically runs along in the background.”

Fund Investments for Retirement Income

Although he has withdrawn a sizeable chunk of these saving, he says he still has holdings in some of the better performing funds. This includes Invesco Perpetual High Income.

This largely UK-based fund has continued to perform well despite losing its star manager Neil Woodford a couple of years ago. The new manager, Mark Barnett has a Bronze Rating from Morningstar analysts.

An analyst at Morningstar says: “We consider Mark Barnett to be a skilled UK equity investor and although team changes in 2014 and his workload temper our conviction in this fund, we think it worthy of a positive rating.” They point out that as the fund is focused on total returns for investors, that is capital growth plus income, it should continue to deliver long-term returns.

One of the best-performing funds in Aves’ portfolio has been Fundsmith Equity. “My wife is also invested in this fund through her pension. It has performed phenomenally well,” he says.

This is global equity fund with a five-star performance rating. Its manager, Terry Smith, has a Bronze Rating.

Muna Abu-Habsa, an analyst at Morningstar says: “In many ways the fund is as characterised by what it won’t own as by what it will. The over-riding philosophy is that Smith looks to invest in compoundable earners, which ideally he could own forever. Ultimately he aims to invest in companies that are already winners and does not seek to identify tomorrow’s winners.”

She points out that this leads to a fund with significant biases, but in performance terms the fund appears to be in a ‘sweet spot’. Between the fund’s launch in November 2010 and November 2015, the fund was up by 16.7% on an annualised basis; by comparison, the MSCI World Index was up by 10.3%.

Aves says he has fewer holding in emerging market funds. “In the past I’ve invested in Fidelity China and Neptune Russia. But these were very volatile: there were periods of fantastic returns, but then what seemed like far longer periods of losses. I sold out of these types of funds a few years ago. I figured at my age I didn’t need the hassle.” 

What funds are in your ISA or SIPP? What have been your most successful investments to date? If you'd like to feature in Investment Views and tell us about your investment strategy, please contact the Editorial team on UKEditorial@morningstar.com

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Fidelity China Focus A-Dis-USD66.21 USD-0.70
Fundsmith Equity R Acc4.44 GBP0.05
Invesco High Income UK Inc388.39 GBP0.40
Neptune Russia & Greater Russ A Acc GBP4.42 GBP-0.43

About Author

Emma Simon

Emma Simon  is a financial journalist, specialising in investment and consumer issues, writing for Morningstar.co.uk

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