It may seem a long way off to some people, but a comfortable retirement is something everyone aspires to. Sipping champagne on an annual Mediterranean cruise appeals to some, others might be content to know they can enjoy a monthly meal out and the same standard of living to which they have become accustomed. But it can only happen if you start early and plan. In order to encourage pension savings and reduce the dependence on the state later in life, the UK government provides various tax benefits and incentives. This means pensions are an efficient savings vehicle and these days come in various shapes and sizes.
The pension industry has had a substantial share of scandals. The pension misselling scandal of the 1980s and 1990s encouraged many people to cash out of generous corporate company pension schemes to take out private pensions with exaggerated promises of returns. More recently, the annuity market has also become a byword for bad value and misselling. Until the pension reforms of 2014, people were able to take 25% of their retirement pension as a cash lump sum, and then buy into an annuity of some sort to guarantee themselves a recurrent income until death. But retirees weren’t always offered the best annuity for their life circumstances and insurers are only now being fined for failing in their retirement pension provision.
Private Pensions Reform
Chancellor George Osbourne’s pension reforms in 2014 have opened up the pensions market and enabled people to take much more control of their future income than before. Private pensions, including self-invested private pensions (SIPPs) which allow anyone to choose how their retirement assets are invested, give people a vested interest in the value of their retirement vehicle. Under the old rules – the only way you could derive benefit from your pension after taking your 25% tax-free lump sum at the age of 55 – was to take an annuity at 65 years of age (pocket money paid by the government for the rest of your life). Therefore you weren’t able to take the remaining 75% of your pension in one go. If we take a pension worth £50k – instead of getting a lump sum you would get approximately £700 per month for the rest of your life (hopefully you live long enough to enjoy it). Now if the stock market and in turn your pension crashes by 30% or the equivalent of £210 less per month it wouldn’t really change anyone’s standard of living. Under the new rules and at the age of 65 – you’re able to take the remainder of what is in your pension as a lump sum. Therefore if someone’s £50k pension loses 30% owing to a crash – losing £15k is a lot more painful than the £210 per month. Consequentially – people are now more active in securing their wealth and thinking about their retirement.
Tax Advantages To Gold SIPP Investments
In 2006, the UK government allowed physical gold to be held in SIPPs. The gold must be in the form of bars and a minimum purity of 995 out of 1000 (99.5% pure). The tax advantages of holding gold in your SIPP are that the government will provide tax relief between 20% and 45% depending on your tax rate. The increase in the value of your gold over time is also accumulated free of capital gains tax, which is normally paid at 28%. Not all SIPPs are enabled to hold gold so it’s worth checking which ones do ahead of any decision.
Another advantage of physical gold is that it is required to be held in a vault and sits outside the banking system, fully insured, regardless of how much is purchased. The current deposit protection scheme only covers assets up to £85,000 if a bank was to fail.
What Investments can be included in a SIPP?
SIPPs allow future retirees to invest in a wide range of assets, including commercial property or land, stocks, investment trusts, exchange-traded funds and physical gold. As with any investment, the value can go up or down depending on the market for that asset. For that reason, the type of investments included in a pension should be balanced and reflect the level of risk suitable for the person. So, a 25-year-old may want more exposure to riskier assets which have a better chance of growth, while a person approaching their retirement may want to protect their pension assets with more stable investment.
Investors can leave their assets in a basket of investments, but as stock markets have risen and crashed, the timing of investment decisions can be crucial to retiring with the best pension pot possible. People who retired in 2008/9, just after the stock market crash and the start of the financial crisis will have found their once bountiful pension pot substantially diminished if they had some of their pension invested in stocks. While longer-term savers will have seen their investments recover over the last 11 years of growth since 2008, investors should be mindful that all bull runs end. And this has been the longest bull run in history.
Taking the profits from the stock market now, and parking them in an investment that tends to go up in value when others are falling, like gold, would give protection to people approaching retirement. And it would provide younger investors with the opportunity to retain the value in their pension rather than having to take the cyclical ‘hit’ to stock market assets.
Signs Of Global Economic Slowdown
The chorus of warnings about a potential global slowdown is coming from almost every corner. The Organisation for Economic Co-operation and Development expects 2019 growth to be the slowest since the financial crisis. Nobel Laureate economist Robert Schiller, who predicted the 2000 and 2007 stock market and housing market crashes ominously says he sees ‘bubbles everywhere’, implying they could burst at any time. And financial analysis company Moody’s is equally gloomy about a possible global recession.
As trade wars, Brexit worries and local economic slowdowns in major countries like China and Germany weigh on sentiment, the smart money is moving into gold. The third quarter of 2019 saw a surge in gold demand, largely from gold-backed exchange-traded funds making sure they kept up with the growing market demand. And by the end of September 2019, central banks had bought 547.5 tonnes of gold, 12% higher than in the same period last year.
The rumblings of an economic slowdown or a more dramatic crash are prompting informed investors and governments to move to safe-haven assets and retail investors have the same opportunity. SIPPs allow control over the assets in your pension, so savvy investors can buy into and out of asset classes to maximise their investments. While maintaining a balanced portfolio, those approaching retirement should consider moving from potentially overvalued investments like stocks to invest in gold, which retains and often increases in value in times of uncertainty.
The current climate is an opportunity to do what the number one rule suggests -and this is what the smart money is doing as we speak – they’re reducing exposure to overvalued assets – equities (they sell high) they move into undervalued assets – gold (you buy low) and then what do you do? You wait. Volatility continues – drives precious metals up. Stocks crash – gold increases significantly. It could be tomorrow, next year or in 5 years – gold and silver are now up to the highs – you’re now looking at a deflated equity and property market. This is the point at which the smart money convert their gains from their investment in gold to take advantage of massively discounted equities and property. This is how the smart money manage to ride every market instead of taking one step forward and one step back.
Find out how to protect your retirement by contacting one of our pension specialists on 0207 060 6902.