How should you invest your pension pot?
This is especially advantageous now, as people are living much longer. By the time you reach 65, your life expectancy currently is 18.5 years for men and 21.1 years for women. The underlying investments will need to keep pace in real terms, as inflation could quickly ravage a static pension pot over such a long timeframe.
"Investing in a spread of predominantly equity-based funds and taking the dividends from the investments as income is a sensible starting point, but each individual's circumstances will be different," says Tom McPhail, head of pensions research at broker Hargreaves Lansdown
Fund and trust suggestions
Other well-respected funds that aim to provide both strong income and capital growth include RWC Enhanced Income, which invests primarily in undervalued UK companies; Threadneedle UK Equity Alpha Income, which invests mainly in UK companies such as utilities; and M&G Global Dividend.
Some investment trusts have been delivering very attractive income - for example, Invesco Perpetual Enhanced Income, New City High Yield and Renewables Infrastructure Group. Take a look at John Laing Infrastructure as well as other social infrastructure trusts such as HICL Infrastructure and International Public Partnerships.
JPMorgan Claverhouse, which aims for capital and income growth from a portfolio of major UK companies, has increased the total dividend paid to shareholders every year for the past 40 years.
Racier Utilico Emerging Markets invests in infrastructure, utility and related sectors, mainly in emerging markets such as China including Hong Kong, Brazil and Malaysia. As usual, there will usually be a compromise between pushing the envelope to obtain a hefty dividend yield and taking some risk.
In the fixed-interest arena, Henderson Strategic Bond fund invests across the international bond market, while the relatively young closed-ended TwentyFour Income fund is heavily invested in residential mortgage-backed securities and collateralised loan obligations.
It will be important to manage your pension withdrawals to ensure income tax is paid at the lowest possible rate. The new Isa (Nisa) will be simplified to allow investment in cash or stocks and shares, or any combination of the two, up to the maximum limit of £15,000 a year from 1 July 2014. It will be a good vehicle for the retirement phase, as income can be taken tax-free.
"Using the yield from a diversified portfolio of Isas can be a tax-efficient complement to pension benefits," says Darren Pearce, head of high-net-worth relationships at Chase de Vere.
"These could be a mixture of active and passive funds, but the Isa wrapper shelters the income from the taxman. Qualifying VCTs offer income tax relief of 30 per cent and tax-free dividends, but these would only be suitable for clients with a more speculative tolerance for risk. Most clients approaching (or at) retirement tend to be more focused on stable returns, as they are not usually able to replace investment losses or falls in investment income with employment income."
Another option is the new National Savings & Investments fixed-rate savings bonds for those aged over 65, which have a maximum investment limit of £10,000 for each bond. These will be launched in January. The Budget promised 'market leading' rates that will be confirmed in the 2014 Autumn Statement. Indicative rates are 2.8 per cent gross AER on a one-year bond and 4 per cent on a three-year bond.
Another development announced in the Budget is that pension providers will offer free advice, in the form of what is being rather grandly termed a "guidance guarantee", at the point retirees choose to draw benefits. While the Budget's statement that "individuals approaching retirement will receive free and impartial face-to-face guidance to help them make the choices that best suit their needs" sounds like personalised advice, it's unlikely that it will be. To be affordable the advice will probably have to be fairly generic.
This article was written for our sister website Money Observer
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
Where APR is the rate charged for money borrowed, Annual equivalent rate is how interest is calculated on money saved. The AER takes into account the frequency the product pays interest and how that interest compounds. So, if two savings products pay the same rate of interest but one pays interest more frequently, that account compounds the interest more frequently and will have a higher AER.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).