About this article
In this second article on the new pension freedoms, we look at the investment opportunities now available to retirees as a result of the reforms, and the pros and cons of the different routes. But first, here’s a brief reminder of how the rule changes will affect the options available.
So what are the options?
Because the reforms introduced in April hand savers total freedom, the options are limitless – Steve Webb, who was the pensions minister before he lost his seat at the general election, has even suggested the Government is comfortable with people splurging their savings on sports cars or exotic holidays.
But early analysis of consumer behaviours suggests most people will take their 25 per cent tax-free cash and leave the rest invested in drawdown. For many people this will be the sensible option – after all, despite the new freedoms, the purpose of a pension remains to provide a secure, decent income that lasts right through retirement.
Non-advised broker Hargreaves Lansdown says the four most popular retirement options in this brave new world are: withdraw funds from the pension and invest in cash, buy an annuity, purchase buy-to-let property, or run a drawdown investment portfolio.
“Annuities offer pension savers a guaranteed income, paid for life,” Khalaf explains
“While they are unpopular because they are inflexible, and you lose access to your capital, the security provided by annuities should not be under-estimated.
“An annuity should certainly figure in everyone’s considerations at retirement, even if it’s only for part of their pension pot. The current level annuity rate for a 65 year old man is 5.6 per cent; the current inflation-linked rate is 3.3 per cent.” Khalaf explains
Investing will be the favoured option for many savers because offers the potential to grow both capital and income over time, ahead of inflation. However, the world of investment is complex, with myriad costs, charges and risks that aren’t always clear at the outset. For many people – particularly those with a pension pot worth £100,000 plus – it is worth considering speaking to a qualified, regulated financial adviser before making any decisions. A list of local advisers can be found on www.unbiased.co.uk.
However, for those confident enough to go it alone, non-advised brokers such as Hargreaves Lansdown and Tilney BestInvest can help access a range of investment solutions.
Khalaf says: “Investing gives you the flexibility to access your capital as and when you want it, and to draw your pension gradually while minimising the tax you pay. The risk is you lose money, though the longer you invest for, the lesser this risk.
Ecclesiastical Higher Income
Hargreaves Lansdown’s verdict: “A little-known fund with a long and illustrious track record. This is actually a balanced managed fund; it invests predominantly in equities, with some fixed interest to reduce volatility.
Robin Hepworth, who runs the fund, looks for companies with a healthy yield he can invest in for the very long term. He has continuously held some of the companies he put money in when this fund was launched in 1994, including GlaxoSmithKline, BP and Shell. The current yield on the fund is 4.2 per cent (variable, not guaranteed).
Marlborough Multi Cap Income
Hargreaves Lansdown’s verdict: “This fund offers investors a different take on the traditional UK Equity Income fund. “Most funds in this space invest in the big blue chips of the FTSE 100, while this one prefers to look for opportunities amongst the UK’s medium and smaller cap companies.
These companies present a fertile hunting ground for seasoned stock pickers like Giles Hargeave and Siddarth Chand Lall, who run the Marlborough fund. The yield on the fund currently stands at 4.1 per cent (variable, not guaranteed).”
Newton Global Income
Hargreaves Lansdown’s verdict: “A growing pool of overseas dividend-paying companies provide a rich universe for fund manager James Harries and his team to pick from.
“The Newton team identify global themes they believe will shape the investment landscape, and invest in companies which stand to benefit. The fund currently yields 3.5 per cent (variable, not guaranteed).”
Woodford Equity Income
Hargreaves Lansdown’s verdict: “Neil Woodford is a contrarian buy and hold investor who is not afraid to step out of line with his peers. “This approach led him to shun tech stocks in the late 1990s and banks in the run up to the financial crisis, shortly before these sectors sold off sharply. As a custodian of long-term retirement funds there can be few better candidates. The current yield on the fund is 4 per cent (variable, not guaranteed).”
It should be noted that these funds are merely a selection of the thousands available to UK investors and, in reality, most investors will mix and match their portfolio based on the level of risk they are willing to take.
Investors could also opt for alternative investments outside funds looking to buy into UK companies. Experience Invest (full disclosure – they are paying me to write this article), for example, allow people to buy into income generating assets such as student property, off plan residential apartments and care homes on a buy to let basis.
Safe investment tips
With great freedom comes great responsibility – and great risks. Experts are already reporting a surge in activity from fraudsters looking to target older savers in the wake of the pension reforms. Many of these schemes, which often start with a cold-call, will promise gargantuan investment returns. However, in reality the asset may not exist or will be extremely risky.