MAKE THE MOST OF THE PENSIONS REVOLUTION
WHY WE’RE CASHING IN ON OUR NEST EGG
THE moment the new pension freedoms were unveiled, Graham Hadfield knew they were for him.
The 57-year- old self- employed builder had never wanted to use an annuity to turn his retirement savings into an income for life.
He had never liked the fact that once he committed to signing up to one, there would be no turning back.
So, when he found out he could take his pot in cash he was jubilant.
‘The freedoms are brilliant. I didn’t want to buy an annuity because it is such a rigid commitment,’ says Graham. ‘As a young man, I just thought pensions were for old people. I wouldn’t have paid in anything if my brother hadn’t talked me into it.
‘An annuity might be more appealing if you’re going to live a long time, but I’ve been a builder my whole life and the nature of the work means we can die as young as 70. Already my health is not so good.’
Graham is just the kind of person for whom Chancellor George Osborne’s new pension freedoms were designed.
He doesn’t have a massive nest egg — in fact, the £18,000 he has accrued across two pensions is below the national average.
When he researched his options for buying an annuity, he discovered he would get an income of as little as £900 a year. ‘That’s certainly not going to buy much. It’s not much more than your food shop for a year,’ says Graham.
‘These changes to pensions mean I can use my pension in a way that suits me best. It’s absolutely fantastic.’
The added flexibility means that Graham is likely to invest. The grandfather-of-one from Derbyshire already has around £6,000 in investment trusts, which pay him a dividend of £60 every quarter, and he has £3,450 invested in another fund. Graham, who lives with his wife Lynda, 57, has two properties that he rents out and they bring in an income of £1,045 per month.
He is ready for the pension reforms and is raring to go. He has put his two pensions into a selfinvested pension plan with investment firm Hargreaves Lansdown, and has already asked to have 25 pc out as a tax-free lump sum — that’s £4,575. The remainder he will keep invested in retirement, something many other savers are expected to do, too.
Others will want to try to boost their pots while still working by taking control of their investments themselves. As we show on the next pages, being a DIY i nvestor can transform your golden years — but it will take dedication and research.
You’ll want to grow your pot, and keep a steady income. And before you hit retirement age is the best time to rehearse.
It might sound incredible, but building a pension pot as big as £1 million is not impossible if you start saving early enough.
If someone had put £300 every month i nto a work pension scheme from their early 20s and that grew at a rate of 8 pc a year, then they would have a pension pot of £1.05 million by the time they retired.
Even if you’re in your 40s and have j ust decided to start planning for your retirement, you can still build a decent pot.
Though you have half the time to save, putting aside £300 a month would give you an impressive pot of £177,000 by the time you can retire.
Alternatively, someone who received a cash lump sum of £41,000 at the age of 25 could turn this into £1 million just by leaving it invested for 40 years, if it grew at 8 pc a year.
When you get handed the keys to unlock your pension, it makes sense to do as much as you can with your cash.
From April 6, rules that allow you unfettered access to your retirement funds from the age of 55 mean savers will be able to nurture their nest egg from the day they first start saving right up to the end of their working life — and beyond. With prudent planning, timing and carefully selected investment funds (and a bit of luck), you could withdraw a chunk of your pension cash and still grow what’s left of your nest egg on the stock market.
here’s our DIY guide on how to take control of your savings to ensure they grow to the maximum.
START YOUNG AND TAKE THE RIGHT RISKS
Saving for retirement is something that’s easy to put off because it is, literally, a lifetime away. But if you follow the principles of starting early and saving regularly it will put you firmly in the driving seat for retirement. And the bonus is that it is never too late to start.
If you want to make the most of the pension reforms you need to have as much tucked away as possible. And even once you retire you’ll still have to look after your pension pot to ensure it’s making you money.
Start drawing chunks of your pension at 60 and you may have two, or even three, decades to invest and turn your pot into a very handsome nest egg.
If you’re in your early 20s, you can afford to take a punt with all sorts of higher risk funds.
Typically, experts suggest you should invest for a minimum of ten years when it comes to more volatile funds such as those putting your cash in Korea, Brazil or India.
Then, as you start to get a bit closer to retirement, you can start putting a bit more cash in safer assets such as company and government bonds, or funds which invest in these.
Or if you’re in your late 50s and want to put a lump sum in a fund in order that it pays out a steady annual income by the time you reach 65, then it will make much more sense to pick an equity income fund that invests in solid UK bluechip companies such as Marks & Spencer or Barclays bank.
HOW TO PICK THE BEST FUNDS
Choosing a fund shouldn’t be a case of putting a finger in the air to see which way the wind is blowing.
Do your research on the dozens of free websites available and you’ll be able to get started on a number of decent funds.
A good first port of call is to look at the free research available from wealth managers, fund brokers and so-called fund supermarkets which sell investments.
Use websites such as hargreaves
Lansdown at hl.co.uk, bestinvest.
co.uk, candidmoney.com and trustnet.com, which are stuffed with information on fund performance.
You can easily compare a fund’s performance with like-for-like figures over one, three, five or even ten years. Many investment brokers have a list of their favourites that will detail the strategy of each one, so you can determine if it suits your needs.
All funds also produce a factsheet. This will contain a report from the manager on their current strategy as well as detailing t he f und’s biggest investments.
You can find these by logging on to f und managers’ i ndividual websites, or by ringing up each company and asking to be sent the information.
There are also regular reports about funds to avoid — Bestinvest publishes its Spot the Dog list twice a year and Chelsea Financial Services has a Red Zone report of underperforming funds.
Another option is to pick a multimanager fund.
These don’t invest directly into company shares or bonds but instead put their money into a selection of other funds.
The idea is that you choose a manager who is good at spotting great funds and who has expertise in a particular area.
It is effectively a one- stop shop investment portfolio.
BEWARE THE HIDDEN CHARGES
Once you know where you want to put your money, there’s no reason to pay more than you need to invest it.
It’s vital to check how much a fund is going to charge you before you hand over any cash.
The figure you need to look out for is the so- called Ongoing Charges Figure, which includes the standard annual fee as well as all the costs incurred by the fund for buying and selling shares which are passed on to investors. The average fund now costs around 0.75 pc a year.
Some will charge more, especially if they’re investing in emerging markets where it costs more to buy and sell shares.
Of course, if a f und i s doing massively well or you’re particularly keen on a certain manager, it may be worth paying a little bit more.
The best way to check if a fund is good value is to check what some of its rivals are charging.
Paying unnecessarily high charges will just eat away at your returns. If
your put £300 per month into a fund and it grew by 7 pc each year, you would have £605,480 after 40 years if the annual charge was 0.75 pc. If the same fund charges 1.5 pc you'd have £494,428 after the same amount of time. Doubling the fee would hack more than £100,000 off of your returns.
THE POWER OF REGULAR SAVING
MOST investors don’t have the luxury of a ready-made lump sum to vest.
Happily, the alternative — regular saving — has been proven time and again to be the most effective way to save money.
Not only does it create a regular habit where you soon don’t notice the money going out each month, but it also takes all of the uncer-tainty out of investing.
Even expert fund managers don’t like investing lump sums at one time , preferring to drip-feed cash into stocks and shares.
Here’s how it works. Imagine you invest £50 a month from September to February, and in each of those six months, your direct debit buys you ten units — worth £5 each — in your chosen fund.
With luck, you benefit from a flood of upbeat economic results that cause a stock market surge and — in turn — raises demand for your fund (and all those company shares in it), which means its price rises.
So while the monthly cost of investing has now risen to £7 a unit — with the result that your next £50 payment buys only 7.14 units — it means that the existing 60 units snapped up for £5 each are valued at £7 each, which is about a 30 per cent rise.
And drip- f eeding small amounts of cash each month soon adds up.
Interest c o mpounded over many years can provide a serious savings boost.
Darius McDermott, managing director at chelsea Financial Services, says: ‘Many of us will play the Lottery every week, chasing the seemingly i mpossible dream of becoming a millionaire.
‘While you might enjoy the odd small win, if you spent £1 a day on the lottery over 77 years you’ll have just a 500 to one chance of winning the main prize in that time.
‘But if you saved £1 a day into a pension pot and it returned an average of 7 pc over that time you’d be a millionaire after 77 years.
‘ It’s t he diff erence between gambling and investing.’
SPREAD OUT YOUR INVESTMENTS
WHEN you invest for yourself the absolute key is to spread your risk.
risk is a word that investment bosses like to use a lot — it basically sums up how willing you are to lose money on the stockmarket. Generally, the older you are and the less money you have, the less risk you should take on.
this is because if your investment does fall heavily you’ll have less time and chance to make back your losses. Also, betting on just one fund can be risky so you can lower your risk by choosing a selection of funds which invest in different regions and in different types of asset.
tom Stevenson, investment director at fund manager Fidelity, says: ‘Diversification is key.
‘No one knows which assets or geographical areas will perform best in future, so the best way to avoid picking the wrong areas is to spread your investments broadly.’
An average investor may typically have a mix of a simple tracker that follows a stock market index, an equity income fund that pays out an income, a growth fund that tries to pick companies capable of latent growth, and perhaps a risky equity fund that puts your cash in volatile — but possibly highly lucrative — countries such as Brazil, India or china.
We asked a clutch of managers and advisers what kind of funds might suit different types of investors.
For those seeking a blue-chip fund in advanced developed markets, Mr Stevenson likes JPM US Select fund. this looks for strong businesses in the U.S. spanning a range of i ndustries. current i nvestments i ncl ude Apple, General Motors, United Healthcare, and Johnson & Johnson. the U.S. has had a stellar run over the past few years and this fund has returned 26 pc over the past year alone.
If keeping your money in the UK is more important, he recommends Lindsell train UK Equity. this fund invests in only around 25 firms and holds them for the long-term. A fifth of its money is tied up in beverage companies such as Guinness producer Diageo and Heineken.
Adrian Lowcock, head of investing at Axa Wealth, likes Newton Global Higher Income fund, which pays out regular income to investors. It picks robust companies from across the globe and its biggest weightings are in consumer and healthcare firms, with current i nvestments including Glaxo-Smith-Kline, roche and Microsoft. the fund has returned 15.4 pc over the past year and is yielding 3.85 pc. However, make sure you choose so-called accumulation units rather than i ncome units in your funds because this means that instead of paying out dividends, they will get rolled up into your investment and boost your returns.
You can tell the difference between the two when you pick a fund because accumulation has Acc by the side of the fund name, and income has INC.
And for those seeking for a slightly riskier option to put a small portion of your cash in, it’s worth considering investment themes.
the polar capital Healthcare opportunities fund looks at the ageing population of the world and trends of increasing wealth, rising levels of obesity and advances in medical technology.
pharmaceutical and biotech firms it currently invests in include Merck, Actavis and perrigo.
Andy parsons, head of investment at the Share centre, says: ‘ As an opportunity to identify groundbreaking advancements, this fund could provide rewards over the medium to longer term.’
the fund has returned 139 pc over the past three years. If you’d put in £1,000 then, you’d now have £2,390.