Please forgive the expression, but I hear these words all the time “pensions are crap”
Clearly none of us want to work forever, so one way or another we are going to have to do something. Having decided not to work forever we can either build up a lump sum of money from which we can generate an income or we need to generate an income flow that does not require us to work at it.
Here are some of the ideas I have come across over the years, some good, and some not so good.
The old favourite – buy property
Sell my business when I retire
The state will look after me
Build up my ISA Portfolio
Invest in something alternative – gold, fine wines etc
Let me say this first of all. They all have their place and in fact I would advocate doing all of them if you can.
So what are the issues with these alternative options?
Well property can certainly be very lucrative, but it does require vast amounts of capital and there are unlikely to be any mortgage companies offering no money down deals again or certainly for a very long time. Property yields for most investor landlords are pretty poor right now at around 3-4%. So you could find yourself having to fund any mortgage over and above the rent you receive. This strategy at the moment is for most, a long term capital appreciation play.
Selling your business can be extremely enticing – we all know at least one person that have sold the business for a few million, but the reality for most business’s is that the owner is the business. As such when it comes to sell, most business rarely sell for the value that they hoped to achieve. Especially if you intend to leave fairly promptly. If you intend to sell up, my advice is to get a specialist in to get your business in the best possible shape to get the best sale price as possible.
State will look after me – err, not likely. Basic Old Age pension for a married couple is just over £150 a week. I don’t know about you, but I would find this very difficult to live on indeed. It’s just not a viable option, but I do hear it from time to time. And my view is this; the amount of state help we all get is likely to reduce in the decades ahead. As a nation we just cannot afford to keep up the amount of state help required to give a comfortable standard of living.
Build up my ISA portfolio – I actually quite like this strategy as all capital gains are tax free. However the maximum you can invest is £10,200 a year per person. There is one downside that I can see and that is that you can withdraw funds at anytime, so you may get to retirement and have a smaller fund than you need. On the other hand having access to your money could be a lifesaver if something unforeseen or unfortunate happens. The key to this one is being very disciplined.
Alternative investments, if you know what you are doing and have the expertise great returns can be made. Unfortunately most people don’t have the time or the knowledge to make this strategy work. I have tried it myself years ago and we did make money, but I was very worried the fine wine was going to disappear at party, not realising it was put down for investment purposes.
Summary – I have to say that if you can do combination of a few of these ideas, you are likely to be far ahead of most people. Despite the poor press that pensions get, they remain the most tax efficient investment for most business owners. And if you are invested in the right funds for you, the final results can be very good. Few investments give investors the tax relief that pensions do and good fund selection with regular portfolio reviews should ensure a long and happy retirement.