Denise Saunders
Alternative investing for Retirement
Financial planning for retirement involves the accumulation of assets over time, in retirement this is followed by decumulation – turning these assets into an income to last for the rest of your lifetime. Pensions are certainly not the only option, in this climate of low pension provision, it is increasingly important to look at retirement holistically.
Historically, the typical retirement accumulation has been through a defined benefit pension scheme or through a type of money purchase pension. Many financial advisers’ I have met have strongly believed that a pension has far less of an impact and flexibility for non higher rate taxpayers, this changed slightly with the introduction of Stakeholder Plans with lower charges to erode your fund. Overall Pension schemes are likely to be the central retirement saving route due to tax relief and their increasing flexibility, since A’Day.
Other products that offer an alternative to Pensions are ISAs, PEPs, investment bonds, unit trusts and OEICs. These products not only offer an alternative for the asset accumulation, but also additional options for producing a retirement income. For example, income from PEPs and ISAs can be taken tax free or capital can be drawn down without any liability to capital gains tax.
I have read that considerable research by both providers and Government shows that a large number of especially young people and women are using or considering using ISAs for retirement savings. One of my female staff members was surprised; she said she would not trust herself not to dip into the ISA fund before retirement especially with her current situation, when her roof needs mending! A pension fund would not be able to be touched whatever situation arose.
I pointed out that using any ISA retirement fund accumulated for the purpose of repairing your home would not entirely be a bad thing. Your home is normally the largest asset you will own, and you can always downsize or release equity to produce a lump sum or an income in retirement. However, retirement savings within an ISA does require an element of self control; you would not want to blow it on a holiday today, to experience poverty in retirement!
There is a tendency to have unrealistic expectations for retirement and an underestimation of life expectancy. Across the western world people are living longer and longevity continues to increase with medical advances. Those with 30 years or more in retirement accumulated assets could run out too early, leaving them in a precarious financial position at a time in life when they are least well capable of dealing with it.
It is vital when considering alternative income strategies that careful consideration is given to the level of income that is required and the effects of inflation to reflect the true future value of money. Also the level of risk which is acceptable because the values of the investment will go up and down, and you may not get back all that you have invested.
We all want to retire healthy, and wealthy. Contact Langtons to discuss your retirment planning.