If you’re like most people, you either don’t think much about your retirement investment or you hope to rely on your pension scheme, whether it’s the UK state pension scheme or a private one or a mixture of both.
The UK state retirement pension scheme was introduced after World War II and was designed to cover everyone in the UK once they reached retirement age.
The problem is that we are living longer, so the payout from the scheme gets bigger each year.
Pensions as a retirement investment
Private pension schemes are designed to top up the basic state pension and are usually invested in stocks and shares.
If you have a private retirement investment such as a personal pension, there is a high chance that it will be invested in the stock market. This brings about a few questions:
How good is the “fund” that your future income is invested in? It’s not feasible for a pension fund to invest in every share so they take a sub-set instead. This could be based on the UK FTSE 100 shares or some other index. Or it could be based on whatever shares the pension fund managers think are the most likely to rise in price.
Whichever method is used, there will be a management charge to offset the cost of investing in shares. This management fee on your retirement investment is charged as a percentage and will be charged to you via your retirement investment fund whether the underlying investments go up in price or not.
If your retirement investment pension scheme invests in shares, it may “track” an index such as the FTSE 100. These tracker funds charge a relatively low fee – typically around 1 to 1.5% – to cover the costs of buying and selling shares and other overheads, usually including a commission to your financial adviser.
Actively managed retirement investment pension funds – where the fund managers do their best to beat the published indexes – will charge a higher percentage. That part’s for certain. Whether they will give you a better return for your money is less certain. The warning that your investment could go down as well as up holds true as does the one that says that you can’t rely on past performance as a guide to future performance.
Over time, stocks and shares have trended upwards but there have been periods where the growth was less or even negative. Stock market crashes have happened over the years – check this list for details if you want.
If you’re young then you can probably ride out these fluctuations but as you get closer to retirement age then a lot of pension managers will suggest that you switch from shares into less volatile areas.
Assuming that you’ve got a reasonably sized retirement investment fund when the time comes for you to retire, the next question is what to do with it.
In the UK, conventional wisdom will suggest that you take a lump sum out of your pension, tax free, and put the rest of the money into an annuity.
This is designed to provide you with an income for the rest of your life. It may also allow for your partner to continue to receive an income if they out-live you.
It’s at this point that you find out whether the indicative returns from your annual statements were fact or fiction. Your financial advisor will talk you through all the different options but suffice to say that it isn’t an easy decision and unless you are lucky enough to be in a retirement investment scheme that pays out a pension based on your final salary, there will almost certainly be compromises to be made.
The biggest problem with taking out an annuity is that – for most people – it dies with you. The schemes on offer work by pooling the retirement investment of lots of people and then making some assumptions on how long the members of the scheme will live on average.
If you’re lucky, you’ll get back more money than you contributed. If you’re unlucky, you may only get a handful of payments. Individually, we have no way of knowing our own personal life expectancy.
Whilst there are laws on how you can invest your retirement investment fund, they are by no means limited to buying an annuity.
With the ups and downs of the stock market, a lot of people are turning to investing in property as an alternative to an annuity.
This kind of investment must be made through a scheme that meets all the Inland Revenue requirements but there are plenty of such schemes to choose from.
Property as a retirement investment
Putting your retirement investment into property has a number of advantages over an annuity:
- Providing it’s properly set up, it can outlive you and be passed on to your partner, your children or a charity on your death.
- It provides an income on your retirement investment by renting out the property.
- There’s normally capital growth with property. Unlike an annuity where you don’t get any capital returned to your estate on your death, a property retirement investment is part of your estate.
If you’d like to know more about putting your retirement investment into property, we can talk you through the different options and find out whether this is the right direction for you.
Use the contact form to arrange an initial, no obligation, retirement investment consultation.