If you're over 50, or about to get there, your finances are set to go through some big changes.
Statistics issued by Prudential reveal that a staggering four out of ten workers have now entirely given up the dream of retiring in their 60s.
In light of falling annuity rates, it might be the case that people with individual pension plans will have to rethink their retirement age.
However, there are alternative strategies available to income-seekers in their 50s and beyond.
Equities (stocks and shares) are a portion of ownership in a company, which entitles the holder to a relative claim on the business’ assets and profits.
They’re perhaps the most well known of investment vehicles but are often dismissed by people who remember the stock market crash of 1987, or by anyone who doesn’t have an appetite for risk.
As a whole, equities are certainly amongst the most volatile of asset classes.
However, they also have the potential to provide the best returns – the key is sensible stock selection.
The best option for those looking to spread the risk is arguably to invest in an ‘equity income fund.’ Under these schemes, monies are distributed amongst typically 50 to 100 reliable blue-chip firms, in sectors such as telecoms, oil, pharmaceuticals and utilities.
They’re a good option for more medium-risk investors seeking to receive good rates of dividend return (often four to five per cent, although yields vary and are not guaranteed), without the level of volatility in share prices that might otherwise be expected for smaller stocks.
Corporate Bonds and Gilts are a form of debt issued by companies (corporate bonds) and governments (gilts) to raise money.
In buying one, you lend the issuer money – which they then promise to pay back, with interest, at a set date in the future.
Gilts are historically fairly stable investments, because there is an expectation that the state will always be able to satisfy any debtors.
In contrast, corporate bonds are considered slightly riskier investment, because they are issued by companies (which are more likely than the state to default).
Because gilts yields are currently so low, investors are increasingly turning to bonds to make up the shortfall.
As with equities, corporate bonds can be invested via funds to spread the risk, or via what is termed an ‘ISA wrapper’. Returns are often in the region of four to five per cent, but again this is not guaranteed.
Although traditionally viewed as a fairly cautious investment, there is concern in the financial markets that corporate bonds may be over-priced at present, so think carefully about the balance of your investment portfolio and be realistic about the level of returns you expect to achieve.
Insurance Company Investment Bonds are typically invested in managed funds or unit trusts. They have the advantage of offering investors an annual income allowance of five per cent of the capital, for up to 20 years, with no tax liabilities occurring until the bond is encashed.
Even then, basic rate taxpayers are unlikely to face any tax when they cash the bonds in, unless gains on the investment are significant. This is because the five per cent withdrawal is treated as a return of capital, rather than income, for tax purposes.
The drawbacks of investment bonds are that they usually carry surrender penalties within the first five years, while the capital value may fall, particularly if the investment return does not match the level of income withdrawn.
The good news is that there are a wide range of investment funds available, which may be mixed and switched, in accordance with the investor’s risk profile.
Just make sure you’re fully aware of the clauses and surrender policies associated with your chosen fund and make sure that it is the most tax-efficient scheme for you.
Permanent Interest Bearing Shares (PIBS) are shares issued by building societies. They pay a fixed rate of interest so, although they are technically shares, their characteristics are more akin to corporate bonds.
At the moment, because financial institutions are looking to re-capitalise, returns on PIBS are extremely attractive – in the region of ten per cent.
While PIBS are generally considered a fairly safe investment, building societies are not invulnerable to becoming insolvent – as demonstrated by the recent banking collapse. Investors therefore need to be confident of the institution’s financial strength.
The other risk is that PIBS usually have no redemption date, and so selling them may not always be straightforward.
As always, seeking independent financial advice is likely to be worthwhile if you’re assessing your investment options. Achieving the best annuity rate available means you have to shop around.
This is particularly true if you are a smoker or have medical conditions that could leave you with a shorter than average life expectancy.
With the correctly structured portfolio and a suitable selection of funds and products, older savers can significantly enhance their income – whatever their age!
by Graham Tracey
Chartered financial planner at IFA, Carpenter Rees
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