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Pension Planning
Pension Planning - Spreading The Risk To Improve The Rewards |
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Planning for retirement is one of the most difficult things to do in a volatile, recessionary market.
Calculating what size pension fund will be required to provide the necessary income for an uncertain
period is fraught with all sorts of dangers. As healthcare and wellbeing gets better over time, we are all tending to live, on average, a lot longer. However, very few of us know exactly how long we will live so planning the perfect pension pot and standard of living is not even an art, let alone a science. One of the best ways to prepare for the future is to try and maximise the fund available at time of retirement. No matter what goals for the standard of living you expect to maintain through retirement, the primary aim should be to build an asset base capable of supporting you for at least 30 years. This is an amazing challenge – especially given the diminishing returns available in the stock markets through either capital growth or dividend income. Therefore, investing in as wide a range of assets as sensibly possible should provide some insulation against a failure of any one sector at the time you want to cash it in. Recent pension legislation and taxation changes have made the task both easier and more flexible – but at the same time more difficult due to the restrictions about how pension fund pots can be cashed in. Therefore, whilst there are significant tax advantages to investing in a pension fund, the downside is a loss of flexibility for the future in how those funds can be spent. For this reason, many people are now looking at a number of alternative ways of saving for the future. Whilst the tax advantages of a pension fund are worth having, there is also a deal of attraction in investing in assets outside a pension fund in order to retain flexibility and more direct management control. With property prices having fallen in most areas by between 20% and 40% from their peak in 2007, investment in residential homes appears to offer one of the better long term capital growth opportunities. Although borrowing is not straightforward, there are lenders prepared to offer good fixed rates to those with healthy deposits – the best rates available to those with over 30% deposit. Although the letting market is also depressed, there is a widespread shortage of housing predicted for many years to come and the UK record of house value appreciation is consistent if, occasionally, with some value corrections! For a similar reason, commercial property can be an attractive investment. Various government grants can be available to assist with the development of property and with the right tenant; good returns can be made over many years. This is less predictable than the housing market and the amounts of investment can be greater. However, there are ways of investing in the commercial property market through trust funds and investment companies that provide exposure to the upside without the hands on liability of ownership. Overseas property has also been a strong market for UK buyers. Whether as a holiday home or a planned retirement location – or both – UK investors have bought heavily in a number of European countries, the US and other, generally warmer, locations. The tax consequences need careful consideration and these, like all property based investments, should be considered long term. Buying in a foreign dominion means that you have the option of either a local currency or sterling mortgage. Many Euro based countries offer mortgages with 25%+ deposits and low interest rates. However, unless you have foreign earnings with which to offset the mortgage repayments, you are exposing yourself to currency movements between where your principal income is, and your liability. There are a number of foreign currency options available including buying forward (to fix the cost), or buying an income stream with which to make the repayments. Both eliminate, to some extent, the exposure to future movements in value. However, if sterling appreciates in value later, you will not get the benefit other than by being able to make additional lump sum repayments (if you retain that option). It is now possible to take much more active management control of your pension planning through a Self Invested Pension Plan (SIPP). Investments can be in stocks and shares, funds, unit trusts, commodities or currency accounts. Deeply empowering, but also refreshingly eye watering! Many different asset classes can be held in a SIPP and it can be a useful, tax efficient investment tool alongside your company pension. |