Tag Archives: pension

Investing strategy….where next?

An economic slow down in China. The Syrian crisis. Sabre rattling from Putin. Will the UK stay in the EU, or retrench to an independent – but uncertain – future?

These macro issues and many other concerns have driven down the FTSE 100 from a peak of 7,097 in April this year to the current 6,400 level, via a drop as far as 5,899 in August.

(chart courtesy of ADVFN)

Of course there will always be volatility in stock markets, but the scale and speed of current movements seems out of the ordinary. And frankly nail-biting and stomach-churning if your life savings are fully invested in shares and funds that move largely in direct correlation with the broader market indices.

I wrote a while ago – when Gill and I stopped full-time work – about our pension position. We’ve missed out on the golden generation of final salary/defined benefit schemes. Annuities are so low that the income you can derive from them is not a viable option for us. So our pension pots – saved from our own earnings, employer contributions  and tax relief – and our other savings & investments have been at the mercy of markets and factors way outside our control.

Up until recently, all our investable assets and pension pots were placed with Hargreaves Lansdown. I’m very comfortable with HL, but I thought we needed to protect against the risk of stock markets collapsing further and for longer. We don’t have an income at present, so we need to preserve our capital.

Thanks to a friend of my brother, I was introduced to Connection Capital.  They “help clients build a portfolio of self selected,  direct investments in private equity, commercial property and alternative asset funds, as part of an organised syndicate“.

I’ve taken some funds out of HL and made some small investments in 6 separate opportunities through Connection Capital, 4 in private equity deals and 2 in commercial property.

The property investments are in long leases on assets let to a Virgin Active gym, and to a Travelodge hotel. The private equity investments are businesses in very different sectors, but they are historically profitable and have raised growth capital through CC.

These are all high risk investments, particularly the private equity businesses. But CC have a good track record and I’ve made what I hope is a balanced decision. My aspiration is that – on average – we’ll get back 2x the original investment in a time scale of 4-5 years. But with no guarantees at all on the amount or timing of any return.

More risky again are the opportunities on crowd funding platform CrowdCube. These are invariably early-stage start-up businesses looking for seed capital. Some have been trading for short periods, some are even at the pre-revenue stage, still testing products or developing technology. Few are already profitable.

I’ve made a couple of very small investments in different businesses showcased on CrowdCube. Each will have gone through some due diligence hoops before going live on the crowd funding platform, but I’m under no illusion how risky most of these opportunities are. Conversely, if they’re ultimately successful, the returns should be proportionately greater.

And then there’s the fun investment in BrewDog, the craft beer business that is taking the world by storm. I bought my shares for £950, at an already frothy valuation. I’m not expecting to make much, but with a 20% shareholder discount I’ll be able to drink myself into oblivion when all our capital has disappeared and we’re looking for the next hot meal…..

So that’s where we are, as they say on Dragon’s Den. Flying by the seat of our semi-retired pants. A decent amount of capital saved over a lifetime of hard work. But needing a reasonable income – or capital growth – to finance a standard of living that we don’t want to be forced into diminishing.

Welcome to the brave new world of pension freedoms, investment opportunities and fluctuating global stock markets.

Fasten your seat belts, it could be a bumpy ride…..

 

Pension Freedom Day – and the politics of choice

Today is Pension Freedom Day. Hooray.

For decades the options for those with Defined Contribution personal pension schemes (compared with those lucky people with Defined Benefit aka Final Salary schemes) has been limited.

You could cash in your pension pot, after a lifetime of working, and buy an annuity for the rest of your natural days. You would then have a secure, fixed income. That income would be less if you wanted it to increase each year in line with inflation, or if you wanted your surviving spouse to receive a continuing proportion, for example.

There are other nuances but essentially the downsides of an annuity are that the insurance company benefits if you snuff it before the actuarial tables say you will, and the taxation implications were always punitive. Not attractive, as I wrote in an earlier article.

But from today, you have much greater choice and flexibility over your pension fund (after reaching 55).

So I give a rousing three cheers to George Osborne and this Conservative government. And I’m not ashamed to shout it from the rafters.

It’s my money. I’ve worked damned hard – well, ok, those 6 years in Bermuda weren’t all that demanding – all my working life, and I deserve the right to make my own choices about what to do with it.

Retire Sign Shows Finish Work And Message Stock Photo

In broader terms, this is a metaphor for capitalism v socialism. The political right want to decrease taxation – personal, to maximise the disposable income in your pocket each month, so that you can decide where best to spend it; corporate, to encourage businesses to invest in people and physical assets. And yes, to make a profit, which should NOT be a dirty word.

The political left believe in increasing taxation to maximise taxes because they want to spend more on public services. Because they know better than us what we need. The Nanny State.

I know which philosophy I prefer. Capitalism – with a social conscience, of course. Socialism doesn’t work, in economic terms. It scares away the wealth creators, discourages inward investment and inevitably causes a downward economic spiral.

I know how I’m voting on May 7th. But if Messrs Miliband and Balls win – with or without the help of a rainbow coalition – at least I’ll be able to buy a car with my meagre pension pot, and drive off to another country. Before they change the rules again.

 

 

 

Pensions…a momentous day @ Just Retiring

I wrote on this site recently about our pension quandary.

3d Character With Question Mark Stock Photo

Image courtesy of FreeDigitalPhotos.net

Well, today is a momentous day in the Just Retiring household….I’ve sent off an income drawdown application pack to Hargreaves Lansdown, requesting payment of the maximum 25% tax-free lump sum from my pension pot, with the rest going into income drawdown.

Why go this route?

Well, I’ve stayed clear of annuities for the reasons I spelled out in the earlier article. And I like the flexibility of income drawdown, under current rules and the new ones proposed with effect from April 2015. Despite the remaining funds in drawdown staying fully invested so the return from that pot is not guaranteed, as it would be from the annuity route.

I’ll have to adjust my investment philosophy a little to rebalance my risk outlook, and also try not to get too emotionally involved with daily market fluctuations. Which is not easy when you’re worried that you’ll run out of money before you shuffle off your mortal coil…..

But the main short-term benefit is taking the 25% tax-free lump sum from my hard-earned pension pot. Come next May, who knows what a political football that could become…it’s potentially an easy target for certain political parties.

Retire Sign Shows Finish Work And Message Stock Photo

Image courtesy of FreeDigitalPhotos.net

Gill and I don’t know yet whether we’ll be working again after our current sabbaticals. We’ll see how long we can survive on the tax-free lump sum I’m about to get from my pension fund, and pray that UK politics and global economics don’t start nibbling – or worse, gobbling – away at the shiny new income drawdown pot.

Retirement is like a long vacation in Las Vegas. The goal is to enjoy it the fullest, but not so fully that you run out of money. Jonathan Clements

Cartoon Businessman Step On Stack Of Coin Stock Photo

 

Pensions….how much is enough?

So here’s the deal….

I’m 57. Gill’s 52. We’re on a break. No, not on a Ross & Rachel Friends break. A work break. Early retirement. A hiatus. A mature gap year.

And that’s the thing…we’re not really sure ourselves yet how long this intermission might last.

How come?

Pensions. How the *&^% do we know if we’ve got enough to get us through however long we need to get through, in the lifestyle and financial comfort that we’d like to get through it in?

We’ve been lucky – and sensible – enough to stash away some savings in a tax-efficient SIPP for the last 15 years, alongside paying off the mortgage. Largely thanks to what I earned and learned working for The Motley Fool and lovemoney.com, Gill’s hard work building up South Minster Kitchens, and using Hargreaves Lansdown’s excellent guidance and online platform to manage our pension savings. And not having children made a huge financial difference. And being teetotal and never going out, obviously.

Until fairly recently, your pension choices were limited, but clearer. Work until 65 for men, 60 for women. Start collecting your state pension from the Post Office every week (along with those really nice mint humbugs), and additionally – if you were lucky – get a monthly, fixed pension from where you worked for 40 years. And oh yes, it probably increased every year automatically, in line with inflation. And that occupational pension scheme income would probably have been a function of your final salary before retirement, rather than a measure of  how much your actual contributions ( personal and employer) had grown to. Not that I’m bitter, or anything.

Ah, how simple things were. Like having only 3 or 4 TV channels to choose from. Or deciding whether to go for a bottle of Liebfraumilch, or that exciting new slightly fizzy Lambrusco wine.

The recent changes to pensions have added flexibility and complexity to that simple – but outdated – view of pensions in retirement. And the further changes proposed by the current government to take effect in April 2015 will provide even more flexibility.

But here’s the quandary Gill and I have to wrestle with now…

  • we’ve got a defined contribution (aka money purchase) pension pot
  • we just missed out on the defined benefit (aka final salary) pension scheme era, giving a decent fixed inflation-linked income for life and certainty over your financial future in retirement
  • I won’t start collecting my state pension until 2023, when I’m 66. Gill will have to wait even longer, until 2029, when she’s 67.  And there’s every chance the dates will be pushed back even further before we get there. If we get there…
  • I’m over 55 so I can take 25% out of my own pension pot now, free of tax. Very nice, but without a current income for either of us that one-off lump sum will have to put food on the table, pay the council tax, and finance any of the fun stuff that we’d like to do while we decide what to do with the rest of our ageing lives
  • we could take an annuity from our current private pension pots. But because of  the prevailing global financial position and interest rate environment, annuity rates have been running at, or near, historic lows
  • for £100,000 saved in a defined contribution pension pot, I’d get roughly £400 a month or £4,800 a year, if I were to swap the remainder of my pension pot for an annuity now – ie an annual return of 4.8%, before tax. And that’s NOT inflation proofed and Gill would get NOTHING after I’ve popped my slightly older clogs
  • it gets worse. I’d only get an annuity income of around £200 a month or £2,400 a year now for £100,000 of pension savings – ie 2.4% return before tax, if I want to protect against the risk of inflation eroding my income and ensure Gill gets 50% of that meagre annuity income once I’ve snuffed it
  • so simplistically that would mean I would have to stick around a long time to make sure I got my money back from the annuity provider to whom I “sold” the pension pot

The only advantage of an annuity that I can see at these levels of return is certainty. You’ll know exactly what your income is for as long as you stay above ground.

Fortunately there is now an alternative. It’s called income drawdown. How does it work?

  • you leave your defined contribution/money purchase pension funds invested, without buying a fixed income annuity
  • you can take out a flexible income, based on what you need and subject at the moment to certain statutory limits (to make sure you don’t spend it all too quickly on fripperies and throw yourself on the mercy of the state too soon…but these restrictions could be lifted next April, and you would then be able to spend the lot on fripperies  and throw yourself on the mercy of the state)
  • the main risk of going into income drawdown is that your pension pot remains invested, so it is subject to market fluctuations – depending how you decide to leave it invested – and your income is not guaranteed

The other great unknown for an income drawdown pension is life expectancy. How long have you got left? The current risk adjusted life expectancy for me is 84, so let’s say another 27 years…..possibly more if I stay really fit and cut out that regular Friday night curry. And let’s say Gill lives to 86, that’s another 34 years for her…maybe closer to 40 if she’s anything like her Nan.

Can we really eke out our current pension pots for that long?

Despite the risks, I think I still find the income drawdown route more attractive than taking out an annuity. It puts quite a burden on you to make the right investment decisions, and not spend beyond your pensioned means, but at least it’s flexible and largely in your control. It is your hard-earned money, after all, and the current government’s attempts to recognise that are to be applauded.

I’ve highlighted some of the decision-making quandaries above, but I’ve still only really scratched the surface of things to think about in making such an important decision.

Why not take a mixture of guaranteed annuity and flexible drawdown income? What are all the other tax considerations, based on current legislation and also after the proposed changes due in April 2015? And what happens to our remaining pension pots, once we’ve both shuffled off our mortal coils, in any of these very different scenarios?

And there’s much, much more to ponder…but the greatest unknown remains the question of life expectancy. How galling would it be for us both to kick the bucket in 5 years time – tragically both crashing on the rocks during a cliff diving competition in Mexico – having taken out an annuity, so that the insurance company enjoys the fruits of our long labours more than we have?

Or if we go the income drawdown route and, thanks to healthy Madonna-like macrobiotic diets and staying fitter than a bunch of butchers’ dogs, both get telegrams from King William….but have run out of pension pot dosh at some time in our energetic 90s?

And there’s the rub. There are just too many variables to be able to make an absolutely correct decision NOW. Unless of course, you know that you’re definitely going to fall off your perch at 9 o’clock on Saturday night, just after Strictly, on 24th October 2026. Then you can really plan ahead, and cut your pension cloth accordingly.

I’ll write again on this mystical subject of pensions and let you know which options we follow, but for now I hope this article has at least highlighted some of the considerations we – and others – face approaching those allegedly golden years of retirement….

“You can always alter and adapt your plan….provided you have one.”
Manoj Arora, From the Rat Race to Financial Freedom