Investing for retirement: Pension alternatives
With recent changes to legislation as well as stringent caps on the amount you can save into a pension, alternatives to ordinary pension savings are at the forefront of many people’s minds.
Life expectancy is rising and the percentage of people with final salary pensions from employment is falling. It makes sense to build your own nest egg to last you through later life.
LISAs, SIPPs or investing?
There are many different structures to help you do this. These include pension options such as a SIPP (self-invested personal pension) or a stakeholder pension.
However, there are other, non-pension, structures that may be well suited to younger people who are investing for their futures, or those who are unsure about whether or not they will need the money before State pension age.
The Lifetime ISA (LISA), which adds a 25pc bonus to everything you save up to £4,000 a year and is accessible for buying a first home or for later life savings once you hit the age of 60. Meanwhile, traditional ISA wrappers no have a £20,000-a-year limit, making them more suitable for large-scale saving. The LISA isn’t an additional allowance above an ISA, the £4,000 allowance counts towards the overall £20,000 yearly ISA allowance. These details are, of course, subject to change and tax treatment depends upon your individual circumstances.
Stocks & Shares ISAs, such as BMO’s allow you to capture the potential of the stock market from long-term growth, making them a reasonable choice for retirement saving.
One popular alternative for retirement is buying a property to let out, although recent changes to tax legislation may make this a less popular option.
Retirement investment strategies
There is no one correct asset class that is the right one for investing for your old age. In many cases, a mixture of several different types may help to reduce investment volatility.
One of the most important things to remember is that, when investing for your old age, starting as soon as possible is likely to be one of the most important factors in success. This is because of the power of compounding, which ensures that any potential returns you have gained from investment early on earn returns of their own, helping your money to grow more quickly.
One of the most common ways for people to invest for their future is to use investment funds or trust. These both work in the same way, pooling your resources with other investors so that your money is spread across many different investments, which is potentially hard to do by yourself unless you are investing a very large sum of money. Investment trusts such as BMO’s Managed Portfolio Trust aim to provide investors with capital growth, as well as quarterly dividends, which you could also put towards your retirement fund.
As with all investments, the value of an investment in both funds and trusts can rise and fall and you may get back less money than you originally invested.
Many funds invest in equities – stocks and shares – which are a popular form of retirement saving. Others invest in bonds, which are forms of debt issued by companies or the Government. Historically, bonds have been a less volatile investment while equities have performed more strongly over most periods.
However, past performance should not be seen as a guide to future performance and a mix of the two types of assets, either in multi-asset fund or in several different funds, could help to reduce the volatility of your portfolio.
Considering investment trusts
Investment trusts, which are bought and sold as shares on the stock market, operate in a slightly different way from normal funds in that they are able to hold back some of their profits in the good times to smooth over performance when the market falls.
This has resulted in some of them increasing their cash payouts (dividends) every year for 50 consecutive years, such as the F&C Investment Trust who has seen an annual increase for the last 47 years. Though there is no guarantee that this will continue to be the case.
Ensuring that you have a properly diversified portfolio is really important, so if you’re not sure of the best assets to fund your retirement, an independent financial adviser could help.
‘This article written by Rosie Murray-West was first published on the Telegraph here.