Pension alternatives: what are the best options for savers?
Property is often seen as the major alternative to a pension. But hedge funds, commodities or even vintage cars can all reap rewards in retirement
With record increases in house prices, it could be tempting to fund your retirement through bricks and mortar, rather than a pension. But with experts predicting a flattening housing market this year, is it time to consider alternatives?
In recent years, surging house prices have cemented the appetite for property investing. Buy-to-let opportunities have been a particular focus, offering both rental yield and capital for those willing to play landlord.
Why property? Unlike pensions, it offers tangible assets that are often easier to understand. However, if the market cools, those attractions could dim.
Still, putting all your retirement eggs into the traditional pensions basket can seem rather unambitious. With life expectancy on the rise, higher inflation and the risk of below-average stock market returns, those who choose this route may find they have less to live on than they’d hoped.
Luckily, there are alternatives to conventional assets to help fund the golden years without the need to rely solely on drawdown or annuities.
Among the alternative assets that have performed well in previous inflationary environments are commodities and hedge funds. Both have proved to be “a good portfolio risk mitigant” in uncertain times, says Tom Kehoe, global head of research at the Alternative Investment Management Association
However, some investors might prefer to look elsewhere. Hedge fund investors need to lock their money away for some years, while commodities are fairly volatile, particularly at a time of heightened geopolitical tensions.
The lure of transforming a lifelong passion for fine art, vintage cars, rare coins, stamps or whisky into a bankable collection may hold appeal for some, rather than charting the vagaries of the property or stock markets. These assets can be borrowed against or sold, or even simply enjoyed.
But while it may be satisfying to own a Banksy or a vintage Ferrari, collectibles too are illiquid assets. It can be tricky to dispose of them if needed, while they can attract high costs and fees. The ever-present threat of counterfeiting is also a worry.
However, a basic lack of knowledge poses the biggest danger for any investor looking to tie up large swathes of their retirement pot in rare coins, cars or digital assets.
“We steer our clients away from more than 90% of the pictures they want to invest in because as experts, we know they will not give them the returns they are looking for,” says Philip Hoffman, founder of the Fine Art Group, which represents some of the wealthiest art collectors in the world.
While some devotees will put up to half of their retirement assets into art, his company advises sticking to 5% or 7% at most, “and ditching any notion of making a fast buck”.
For those who can lay their hands on a minimum £75,000, Hoffman recommends buying one quality artwork in favour of a collection of lower-quality pieces. As long as an investor is prepared to hold the asset for a minimum of four to five years, he believes returns can be impressive.
That’s not to say you should turn your back on property, of course. For people who prefer to enjoy their investments every day rather than charting their gains and losses on a screen, real estate can offer a far more visceral experience, despite being in the illiquid category.
“Property is often discussed as an alternative to pensions, with the self-employed in particular favouring it,” says Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown. However, while there’s been strong growth in the property market, it’s not immune to falls, she warns. “Relying solely on property to fund your retirement means you aren’t sufficiently diversified and if the market drops, then so will your retirement fund.”
When the cost of buying and selling property is factored in – solicitor’s fees, ongoing maintenance and the potential for capital gains tax, not to mention the hassle factor – she believes that pensions can often outperform bricks and mortar.
But whether you’re looking at pensions, property or paintings to help fund the later years – either as a key investment or an interesting side hustle – your current life stage should be a crucial factor in your calculations.
A key to successful retirement planning is managing liquidity at or near to retirement. While those within sight of finishing work may be uncomfortable holding too many illiquid assets, the liquidity premium is likely to be far less of a concern if retirement is many decades away.
To Stephen Jackson, executive director and financial planner at the private bank Coutts, holding a variety of different asset classes is by far the wisest approach when it comes to funding later life. He thinks it’s “unlikely that pensions alone can deliver sufficient retirement income to satisfy most people,” due both to the limited annual and lifetime allowances and to changing legislation.
However, alternative investments have their drawbacks. Few can deliver a regular and reliable income in retirement and if investors need cash in a hurry, selling fast and at a good price can’t be guaranteed.
In contrast, the generous tax breaks offered by pensions still make them a highly efficient way to save for retirement, says Morrissey. “Being invested in the stock market for the long term is the best way of delivering inflation-beating returns that will give you a resilient retirement income. Quite simply, pensions take some beating as a retirement planning vehicle,” she says.
While property and a pension can deliver substantial long-term growth, there are always opportunities and risks to consider.
“Overall, an investment approach which combines a suitably diverse range of asset classes, maximises tax breaks along the way and provides access to liquidity when needed, is likely to serve investors well in generating sufficient funds to support their retirement,” says Jackson.