Your IndustryApr 1 2015

Alternative sources of retirement income

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Buy-to-let

A common tale many advisers are telling is of estate agents contacting them to see if their clients want to use their pension cash to purchase a buy-to-let abode to see them through their twilight years.

Buy-to-let offers the potential for growth and bricks and mortar is a visible investment, which many investors find reassuring. If the right abode is purchased, a buy-to-let could provide a regular income.

However the success of buy-to-let relies on the investor’s ability to find good tenants and the availability of suitable properties.

The investment also comes at a price with the property needing to be maintained, insurance costs and the cost of agents also have to be factored in.

Also, property is an illiquid investment and there may be delays in selling if the individual needs the cash for immediate needs, for example if they must move into long term-care.

Once again, Aegon’s Mr Macmillan points out that buy-to-let is not as tax efficient an option as pensions.

In terms of the pot to buy bricks and mortar advisers should note cash will be taxed as income on the way out of a pension, possibly pushing people into a higher tax bracket and leaving a smaller fund to buy a property.

All income taken in the same tax year will be subject to the higher marginal rate, income tax will apply to rental income, while stamp duty will be charged on the purchase price. Capital gains tax is payable on growth following the sale of a property and on death the property will form part of the estate for IHT and will be taxed accordingly.

David Trenner, technical director of Intelligent Pensions, says there are some dubious property salesmen looking to pick up investments of money that is withdrawn from pension funds.

“While collective property funds give a bit of diversification direct property investing involves high risk of value falling (negative equity was a huge problem throughout the 1990s), vacant periods and high management costs.”

Investment funds

An array of different investment vehicles are also being presented to advisers as an alternative by fund managers who are keen to push their wares.

Investments offer the potential for growth and/or regular income depending on the individual’s risk appetite. But value and opportunity for growth will vary according to the markets.

With this approach there is a very real risk of the value of an investment falling and therefore the pension experts FTAdviser spoke to warn certain vehicles may not provide an adequate retirement income. Also, certain investments will not provide a regular income.

On death any investments will form part of the estate and be taxed accordingly.

To avoid this, funds could be invested in via a pension wrapper such as a Sipp, which would also typically provide drawdown or lump sum access options from which to take income. Where the income over time stacks up, the option could therefore be a viable part of a retirement portfolio.

Bank it

Akin to stuffing it all under the mattress given the state of interest rates at the time this guide was produced, there is also the option of keeping the money in the bank.

Individuals are increasingly used to doing online banking and this approach allows greater visibility.

Interest is payable on accounts - although the first £1,000 of savings for a basic rate taxpayer and £500 for a higher rate taxpayer are now tax free - and this is a familiar and easy way to manage savings.

But banks currently offer low interest rates, even despite the savings tax concession. The value of the pot can be eroded by inflation and these accounts do not provide a regular income.

With the ease of access to the cash in a bank account, Aegon’s Mr Macmillan warns there is a risk of frittering away the money. And once again, on death any cash will form part of the estate and be taxed accordingly.

Pensioner bonds

Pensioner bonds, or 65 Plus Guaranteed Growth bonds, are another alternative being presented to savers.

According to Aegon’s Mr Macmillan these bonds offer higher interest rates than currently offered in the regular savings market with 2.8 per cent for one-year and 4 per cent for three-year terms.

These bonds offer fixed and guaranteed rates of interest and returns are guaranteed as these products are underwritten by the UK government. As a result these bonds are low risk.

There is an ability to invest up to £20,000 or £10,000 in each term. These bonds are only open to people aged 65 and over and this is a limited offer, with only £15bn available, on a first come first served basis. The three-year term bond will be available until at least 15 May.

Savers need to invest at least £500 and these bonds do not provide a regular income from savings.

Interest growth is taxable and on death any funds will form part of the estate and be taxed accordingly.

Tax-efficient investments

Paul Evans, pensions technical manager of Suffolk Life, says VCTs and EIS are also being pushed as alternatives to traditional retirement income products.

These vehicles provide income tax and CGT benefits in return for investing in smaller, unlisted companies.

They have both minimum and maximum investment limits and monies must be held for a number of years in order to gain CGT relief.

They have the potential for significant returns but Mr Evans points out they are considered high-risk investments.

Delay retirement

Since employment legislation was relaxed in 2011, Mr Evans says the number of investors looking to continue working beyond retirement age has increased gradually.

For many, he says the opportunity to move to part-time hours or to strike out in a new direction is an appealing way to continue to earn money or to continue to build up further pension funds.

However, for some he says there may be little choice as they need to continue working as their pension may not be large enough to support them in retirement.

Alternatively, they may struggle to find a company willing to employ them, or find health prevents them from continuing work.