As you start to consider your retirement finances, you’re looking for income but you’re also looking for safety. How do you make the most of the money you have in these turbulent economic times? We look at your investing options and explain how they work and what they could do for you.
What is an annuity?
An annuity is a financial product that turns the lump sum in your pension pot into a regular income for the rest of your life.
Is now a good time to buy or should I wait?
As long as you’re healthy then it’s always a good time to invest in annuities, although rates aren’t what they once were. This is because people are living longer and therefore receiving more payments.
If you’re in good health and can expect to live well in to your 80s or 90s then an annuity’s a good idea. However, if your health is poor and – as morbid as it sounds – you think you may only live another five years, then it may not be for you.
What sort should I go for?
There are various options when it comes to annuities – some involve a degree of risk and others don’t. The Pension Advisory Service has clear information about the different types of annuity product you could buy.
This is one area of finance that’s hard to do by yourself so you really need an adviser. Remember that you’re making a very important decision that will affect the rest of your life.
How to shop around
Like any product, you need to check every company on the market to find the best deal. In particular, you should check what they’re charging for consultation. Whichever you go for, it needs to be something you’re comfortable with that suits your lifestyle.
Be realistic. There are people who think they can retire early but realise that they’re way off when studying the figures. In the past, people would burn themselves out in order to retire at 65 but then only live another few years. Now people have more of a life balance and are prepared to work a bit longer to enjoy more time in retirement.
What are gilts?
Gilts are loans to the government. They’re similar to corporate bonds except they’re raised by governments rather than companies. They might also be called ‘fixed interest securities’ or ‘bonds’.
In return for this very kind loan from you, the government promises to pay you interest for every year you loan them the money.
How do gilts work?
When you buy a gilt, you’re lending money to the government and it promises to pay you interest each year for that loan.
The rate is fairly low and can look very poor relative to the interest rates you could get on savings bonds.
However, the Bank of England base rate is so low that the interest we get on ordinary savings is pretty pathetic – so gilts can provide a better return. Also, unlike savings bonds, which normally last for one to five years each, government bonds can last for decades.
Most gilts are issued for a fixed period of several years. Short-dated gilts are those with a period of up to five years before redemption (the date at which you are repaid), medium-dated are for those between five and fifteen years, and above fifteen years the gilt is known as long-dated.
However, you don’t have to keep them for all that time. You can buy and sell them on the open market whenever you want. Selling on the open market can mean you receive a lower price than you invested in the stock – or a higher one. That’s because the daily price on the open market changes.
If, for example, the interest rate on your bond is higher than other investment options on the market at the time, you can sell each bond share for more than the individual bond value. This is because investors will find the long-term higher interest rate appealing.
Should I buy gilts?
Gilts are good for those who are looking for a very safe, fixed income. They’re also helpful if you’re looking for something stable to add to a more adventurous set of investments.
As gilts last such a long time, if you’re thinking of buying into them you have to consider how you think the Bank of England interest rate will move in the future. This is because you could get a nice regular income simply by putting your money into savings accounts with banks or building societies.
If you think base rate is likely to go up and stay up for a while then you could be better off putting your money into savings accounts. However, if you think interest rates could generally go down then a long-term gilt would be a good buy.
If you’re interested in investing in gilts then your next stop should be our complete article on the subject – it’s packed with easy-to-understand information to help you make the right decision.
At this stage of your life you need to be creating a stable savings base. You can still invest in some higher risk options, but need to balance this with a secure portfolio to shore up your retirement income against the fluctuations of your high-risk investments.
This means that you should be concentrating on putting regular amounts of money (however small) into savings accounts.
What kind of savings account should I go for?
It all depends on how much you’re willing to lose. If the answer is nothing then a cash investment is the solution. If you’re willing to lose a bit – say 10% or 15% – then a portfolio account is best.
If you’re over 50 then you’re probably going to want to risk less than you would have done in your 20s and 30s. With this in mind, you may want to lean more towards bonds and away from equities.
Make sure you use your ISA allowance! From 6th of April 2017 you have £20,000 of tax-free investment available, so use as much of it as you can. This amount can be split between a cash ISA and a shares ISA however you want. See our essential cash ISA article for more info.
How should I invest my money?
Pay attention to the market: you’re entitled to move your money between savings accounts as you wish. If you’ve opened a savings account or an ISA with a bonus rate, make sure you look for a new account when this attractive offer ends. Otherwise, what was a 3% return might become a 0.2% return.
Remember: if you move money out of a fixed-term savings account before the term is up, you’ll not benefit from the interest. It’s important to have a mix of easy-access cash savings on a slightly lower interest rate and long-term savings locked away on higher rates.
See our article on savings help for over 50s if you’re struggling to find the cash to put away.
Any other tips?
Have plenty of cash available so not all your money is tied up in investments. That way if you need cash you have something available without touching or altering your saving plan.
See our article on savings help for over 50s if you’re struggling to find the cash to put away.
Thanks to Louise Oliver of Taylor Oliver Financial Planners for her help with this section
What are high-yield shares?
Part of the profits of certain shares go back to shareholders in the form of dividends (cash payments per share held).
The term ‘yield’ means the yearly dividend income divided by the share price. So high-yield shares are those that have an above-average yield – normally over 5%.
Why choose high-yield shares?
Some people believe that high-yielding shares offer the best investment in terms of total return. If you invest in shares with 10% yield, you should double your investment money in around seven years. However, like most financial products, there’s an element of risk involved.
Should I invest in high-yield shares?
Yield, risk, stability and safety of funds are all factors that you should consider. Ultimately, you should seek the services of a financial adviser before making a decision. High-yield shares could be a good investment as part of your overall portfolio – but shouldn’t be your only long-term retirement income plan.
Property is one of the best investments you can make. The buy-to-let market is very popular and it’s easy to see why.
What does ‘buy to let’ mean?
This simply means that you buy a property, be it a flat, house or even business premises, with the sole intention of renting it out for a regular income rather than living in it yourself.
Is it as easy as it sounds?
In a word, no! However, if you’re prepared to be committed then there’s a very healthy income to be made. Here’s what you need to consider:
- In a word: no! However, if you’re prepared to be committed there’s a very healthy income to be made. Here’s what you need to consider:
- Research: Find out if buy-to-let is for you. Ask friends and colleagues about their experiences. You don’t want to go head-first into this if you’re not suited to it.
- Buy in the right area: When looking at houses, put yourself in your prospective tenants’ shoes – would you want to live in the area? You’ll need to be quite cynical and question why a house is very cheap.
- Do your sums: You need to work out how much you’ll need to spend on the property to get it up to standard and calculate how long it’s likely to take to make this money back from rent.
- Shop around for the best mortgage: Find a local mortgage adviser to help you find the right buy-to-let mortgage deal for your circumstances. Brokers have access to extra deals you won’t find on the high street, so you could save thousands of pounds on your mortgage by using an adviser.
- Decide if you want to manage the property yourself: Having a letting agent not only advertise but also manage your property can take a lot of the hassle away. If anything goes wrong in the house then it’s the agent getting calls from tenants, not you. This comes at a cost, of course. Depending on how busy you are you may just want to deal with all this yourself.
- Be selective with tenants: A careful screening process is vital – don’t accept the first applicant simply because you want the money coming in immediately. Ask yourself whether you’re happy to have smokers or pets, for instance. Meet applicants yourself and insist on references. Chasing up rent from an unreliable tenant and dealing with neighbours’ complaints can be very stressful.
How much can I make?
It depends on many factors such as the property type and area, but you’ll be looking at anything from £400 a month for a one-bed flat to over £1,000 a month for a family home. Even allowing for costs and mortgage payments, this can be a very lucrative and reliable investment.
A bit of short-term pain will produce better long-term gain. If you’re prepared to spruce the place up a bit then not only will it get snapped up quickly, you can also justify charging more rent.
If you’ve had experience with any of these investments then let us know by commenting below.