“What really interests me is whether God had any choice in the creation of the world.”
(Albert Einstein, 1879 – 1955)
Choice is what we all need when it comes to the big decisions in life and this is particularly true for retirement. Without choice, we have a tough and unpredictable road to travel on our way toward retirement that is made umpteen times more difficult. No-one knows for certain what the future holds.
What choices then do you have to achieve your retirement plans?
Are you limited to pensions only?
What viable alternatives exist?
And what are some of the advantanges and disadvantages of each available choice?
Individual Savings Accounts (ISAs) are the obvious alternative to a pension. We say “obvious” because it is the most straightforward of all the tax-efficient forms of investment i.e. you have an annual ISA allowance (currently £10,680) that can be split between a safe cash investment and riskier investments such as fixed income funds, property funds or stocks and shares.
When you want access to the monies invested in your ISA you can get to it (usually without penalty) and don’t have to wait for it until you reach a particular age i.e. 55 or older. And all ISA growth, together with any encashments / withdrawals, are tax-free – no income tax, no capital gains tax to pay.
Nevertheless, ISAs come with their downsides too:
Without a carefully structured financial plan, your ISA could leave your loved ones (aka “beneficiaries”) with a sizeable inheritance tax bill if your investments experience strong growth.
Also, ISA contributions do not attract the major benefit of tax relief. Even for a basic-rate taxpayer, there is an immediate return on investment of 25% for someone investing in a pension compared to an ISA i.e. if you put £80 into a pension and put £80 into an ISA, the ISA has to rely solely on the performance of the investment whereas the pension will immediately receive a £20 uplift in tax relief. (£20 is a 25% return on your net investment of £80.)
2. Property & Equity Release
The conventional wisdom surrounding property is that it is an illiquid asset and, therefore, may be difficult to realise a profit when you need it. This is true. However, property is an unusual alternative in many respects because it entails, both, the considerable risk previously mentioned and yet is still strangely quite low risk. Here’s why:
The fact that property is tangible and is an investment that you can touch, smell and feel, gives many of us a sense of security. Investment is not driven purely by money; there are many psychological factors too and one of them is definitely if we feel safe with our investment. Bricks and mortar does that for many-an-investor, possibly yourself too, and when this is coupled with the fact that there has been a consistent demand for property in general terms because people need houses to live and places to work from; and as long as these basic needs persist, then property will continue to be perceived as a low-risk investment.
Financially speaking, property is able to potentially provide both a regular income stream (through renting) and capital growth (via rising property prices). Whether it be your own home or through a portfolio, the strong attraction of building up equity in property and then releasing that equity after a number of years, is hardly surprising.
So what are the main downsides to property being your pension? The major risks seem to rest in answering the following questions:
- Will the property & location still be in demand when you come to sell it or release equity from it in the future?
- Will property prices rise enough in order to cash-in the equity and use it for your pension?
- Can you say for sure that, in the future, you will downsize to a new property or leave less of an inheritance to your children?
3. Direct Share Portfolio
This is a *very* high risk strategy and should only be undertaken if you genuinely believe you are an “Experienced Investor”. In real terms, you are up against men and women who live, think and breathe investing on a daily basis; possibly hourly basis for some of them, such is their passion for the financial markets.
Nevertheless, this is definitely a viable alternative if you are willing to research each selection thoroughly and though we cannot advise you on the actual stock selections themselves, we most certainly can advise you as to the most tax efficient way to build your portfolio.