Monthly Archives: March 2018

Avoiding hidden dangers in retirement

Make sure you don’t run out of money or face a reduced standard of living

Increasingly, more and more pensioners are keeping the bulk of their pension fund invested after they retire. This means they’re faced with two very different risks when deciding what to do with their savings in retirement in a world of ‘pension freedoms’. Since April 2015, people who reach retirement have had much greater flexibility over how they use their funds to pay for their later years.

A recent report [1] identified that many savers in retirement are either taking ‘too little’ risk (the ‘risk averse’ retiree) or taking ‘the wrong sort’ of risk (the ‘reckless’ retiree). Each of these approaches increases the danger of a saver either running out of money during their retirement or having to face a reduced standard of living.

The risk-averse retiree – how can you take too little risk?

An example of taking ‘too little’ risk is the saver who takes their tax-free cash at retirement and invests the rest in an ultra-low-risk investment such as a Cash ISA, believing this to be the safe approach. The report points out that ‘investing in retirement is still long-term investing’ and shows that decades of low-return saving can seriously damage the living standards of retirees.

It highlights the case of someone who retired ten years ago with an illustrative pension pot of £100,000 which they invested in cash. Assuming they withdrew money at £7,500 per year (in line with annuity rates at the time), they would now be down to £27,000 and likely to run out in around four years’ time, less than fifteen years into retirement. By contrast, if the same money had been invested in just UK shares, there would still be around £48,000 left in the pot, despite the 2008 stock market, and market volatility.

The reckless retiree – what is ‘the wrong sort’ of risk?

In an era of low interest rates, some retired people may be tempted to seek out more unusual forms of investment with apparently high rates of return but accompanied by much greater risk to their capital. Examples could include peer-to-peer lending, investment in aircraft leasing or even crypto currencies such as bitcoin.

Concentrated exposure to a single, potentially volatile investment can produce very poor outcomes, particularly if bad returns come early in retirement.

The rational retiree – what is the best way to handle risk in retirement?

Rather than invest in an ultra-low-risk way or chase individual high-risk investments, the report identifies a ‘third way’ of spreading risk across a range of assets, including company shares, bonds and property, both at home and abroad. This multi-asset approach can be expected to provide better returns over retirement than cautious investing in cash but also helps to smooth the ups and downs of individual investments.

The pension freedoms introduced in 2015 opened new possibilities for people in retirement, but they created new dangers as well. There is the danger of being too cautious and not making your money work hard enough – investing in retirement is still long-term investing. There is also the danger of taking the wrong sort of risk, seeking high returns but putting your capital at risk. Spreading money across a range of asset classes and in different markets at home and abroad is likely to deliver better returns in retirement – and a more sustainable income – than remaining in cash, without exposing you to the capital risks that can come from chasing after more exotic or risky types of investment.

Help to ensure your expectations are fulfilled

By understanding your retirement plans, we can help ensure your expectations are fulfilled by establishing tailored plans to preserve your capital, produce income and pass on wealth securely and efficiently. If you would like to review your current planning provision, please contact us – we look forward to hearing from you.

 

Source data

[1] Research report published 13 January 2018 by mutual insurer Royal London

Warnings

  •  The article above is provided for information only. It does not constitute advice, a personal recommendation or an offer of any services and is not intended to provide a sufficient basis on which to make a decision.
  • These investments do not include the same security of capital which is afforded with a deposit account.  You may get back less than the amount invested.
  • The value of investments and income from them may go down.   You may not get back the original amount you invested
  • Assessing pension benefits early may impact on levels of retirement income and is not suitable for everyone.  You should seek advice to understand your options at retirement

 

SSAS – How to Transfer Wealth Tax Efficiently in a Family Business

As you may be aware, at Carpenter Rees we have many years’ experience in setting up and administering Small Self-Administered Pension Schemes (SSAS) for our own clients. Whilst we are financial planners first and foremost, SSAS do form an important part of many of our client’s financial plans. Set out below is a typical case study demonstrating how the use of SSAS can assist our clients in their financial plan.

Husband and wife team, Roy and Janet have a business which makes and sells garden furniture.  The business has been doing so well in recent years that their sons Alan and John have joined the business.

Roy and Janet have indicated that they intend to hand the business over to their sons in stages, as they would gradually like to take more time out of the business to enjoy travelling together and would like to replace some of their earned income with pension income.

The business operates from a rented warehouse and the landlord has recently offered

Spring Statement 2018

Chancellor of the Exchequer, Philip Hammond, delivered his first Spring Statement to Parliament on 13 March 2018. In a break with recent tradition, the chancellor did not use the financial statement midway between Budgets to present a ‘mini-Budget’ or pre-Budget report.

The chancellor’s Spring Statement 2018 is a response to the Office for Budget Responsibilities’ (OBR’s) latest economic and fiscal forecasts and provides an opportunity to set out government priorities and consultations ahead of the Autumn Budget later this year.

Projections for growth

Mr Hammond upgraded projections for growth and predicted falling inflation, debt and borrowing in his 26-minute statement. He claimed the UK economy had reached a turning point and there was ‘light at the end of the tunnel’.

The UK economy will grow faster this year than previously forecast and the deficit will be some £5 billion lower, with the overall economic and fiscal picture ‘broadly the same’ according to the OBR.

Future spending rises

He ruled out an immediate end to austerity but hinted at possible spending rises in the future, announcing to the House of Commons that growth was forecast to be 1.4% this year, 0.1% higher than forecast by the OBR in November, with the forecast for 2019 and 2020 unchanged at 1.3%.

Mr Hammond said debt would fall as a share of Gross Domestic Product (GDP) – the main measure of UK economic growth based on the value of goods and services produced during a given period – from 2018/19, which would be the start of ‘the first sustained fall in debt for 17 years, a turning point in the nation’s recovery from the financial crisis of a decade ago’.

Public sector borrowing

Mr Hammond revealed that public sector net borrowing in 2017/18 would be £45.2 billion, down from the £49.9 billion forecast in November and as a share of GDP that would be 2.2%, lower than the 2.4% previously expected.

He also hinted at possible spending increases to come in his Autumn Budget when he will ‘set an overall path for public spending for 2020 and beyond’ with a detailed spending review in 2019.

Click here to read our guide to the Spring Statement 2018.

What does the Spring Statement mean for you, your family and your business?

If you would like to review your personal or business plans to ensure they still remain on track, or if you have any further questions, please contact us.

Green and Pleasant Investing

There is a growing interest among clients in the concept of green and socially responsible investment. This has led to an increase in money managed under responsible investment strategies of 25% between 2014-16 according to the 2016 Global Sustainable Investment Review.

As individuals we can all express our views around sustainability via the ballot box; as investors we can express our preferences through participation in the global capital markets.

The main issue is how this can be done without compromising the desired investment outcomes. How can portfolios reduce their investments carbon footprint, ensure investments are not being made into companies associated with undesirable issues like arms tobacco child labour etc and still have a diversified portfolio proving the desired long-term returns?

There is a challenge in achieving the dual goal of sustainability and social consideration are met while building investment solutions aimed at growing wealth for the future.

For clients who request this type of investment, Carpenter Rees often incorporate a sustainable fund from Dimensional Fund Advisers into their portfolio’s.  The Dimensional solution to sustainable investment is to first focus on concentrating on the sources that generate high returns for clients while minimising costs. This is a philosophy that sits across all our model portfolios.

From this base, Dimensional then evaluate companies on a broad array of sustainability measures (such as carbon emissions, land use, toxic waste and water management). That means looking at companies across the whole portfolio and within individual sectors and ensuring that the worst offenders, based on a low sustainability score, are removed altogether. Those that are left are over weighted or under weighted based on how well their score ranks on a set of key sustainability criteria. This process ensures that diversification can be maintained while encouraging good behaviour.

The outcome from research shows that this enables a dramatic reduction in investment into Companies not addressing carbon emissions whilst maintaining diversification and ensuring the focus remains on the drivers of investment return.

In the socially responsible area of factory farming, cluster munitions, tobacco, and child labour there are clearer factors which excludes them. Companies deriving a significant proportion of their income from these areas or from gambling tobacco, or any of the other non-socially sustainable activities can be excluded altogether.

The two functions of return and sustainability need not be incompatible concepts. There is a systematic process to ensure diversification and targeting the sources of higher expected investment returns to ensure a green and pleasant investment portfolio.

 

Warning: The above information is provided for information only. It does not constitute investment advice, recommendation or an offer of any services and is not intended to provide a sufficient basis on which to make an investment decision.