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CHAPTER 13 INVESTMENTS DURING YOUR RETIREMENT
DON'T BE AFRAID OF THE STOCKMARKET
Most pensioners are scared of the stockmarket. We get more conservative as we get older and we think of the stockmarket as gambling. But have a quick read through Chapters 3 and 4 again. THE WORST PLACE FOR YOUR MONEY is a savings account or the post office. Inflation will gradually erode the real value of your money and if you live off the interest, the value will decline further and faster.
The stockmarket is the best place. In the longer term, there is very little risk. The returns should exceed inflation and the return from other investments. And retirement is a long term proposition. If you live for another 20 years, you want to make sure that you preserve the real value of your money and the only way to do this is through a diversified stockmarket investment.
And there is a significant tax advantage to investing directly in the stockmarket. The return comes from two sources - dividends and capital gains. The dividends will be taxed as normal income at 20% or 42% depending on your other income. Capital Gains Tax is only payable when you sell the shares. The first £1000 gains a year is tax free(£1000 each if you are married), so if you are gradually cashing your shares you can save some tax this way. But the big advantage is that when you die, there will be no CGT payable on the profits of your share portfolio. If you have a deposit account you will probably be paying DIRT at 20% every year. If you have a with-profits bond or a unit-linked fund, you or your descendants will pay 23% exit tax when you die.
IF YOU NEED A REGULAR INCOME
If you need a regular income from your stockmarket investment, there are a few ways of getting it. Shares pay dividends which is of course income but as the dividend yield is quite low, it might not be sufficient. You can also get an "income" by selling shares. If the value of your portfolio is growing, there is no harm in selling some shares as the remainder will be worth more than your original investment.
But buying and selling shares have high transaction costs in terms of stockbrokers commissions and stamp duty. It might be worth considering putting enough money for about 2 years into a unit-linked fund which has no entry or exit charges. You can cash this as you need the money without penalty. In fact they can be set up to automatically pay an income into your bank account every month.
STILL NOT CONVINCED THAT THE STOCKMARKET IS SAFE?
No matter how often we say it and no matter what graphs we show and no matter how wealthy friends of yours have become through investing in the stockmarket, you are still cautious. You like the safety of An Post or the building society.
OK, we have done all we can to convince you and we have failed. But do us and yourself a favour - put some money in the stockmarket. Maybe try 10% of your money. Depending on how much you have this might not be enough to buy shares directly, so buy a unit linked fund or buy a with-profits bond. If you are comfortable with this investment over the next few years, then you might allocate some more money to the stockmarket.
PRODUCT RECOMMENDATION - THE STANDARD LIFE WITH PROFITS BOND
DON'T BE AFRAID TO ENJOY YOUR MONEY
The big problem
about retirement is the enhanced level of uncertainty :
How long will you live ? You might last 10 years or 30 years.
You have enough money for 10 years, but what if you live for 30 years
?
Will you need to go into a nursing home ?
What will your investments earn ?
How much will inflation be ? Will it destroy your savings ?
Because of this uncertainty a lot of pensioners try to "live off the interest", so that they are not touching their capital. And lots of pensioners who have cut back during their retirement die leaving a substantial property and money in the bank to their heirs.
We are not saying that you should go on a spending spree. But enjoy life and don't be afraid to go on holidays or to heat the house or to pay for the things which will make your life comfortable.
If you have your money in a deposit account, inflation and occasional withdrawals will gradually deplete it. If it is in the stockmarket, you should be able to take out about 7% a year on average and still maintain its real value.
RELEASING THE VALUE OF YOUR HOME
Most pensioners own a valuable property when they die. This is ok if they have had sufficient money to live on. But it is a shame to see people living in poverty during retirement and then leaving rich kids behind them.
Forget your kids - live out your years by spending your money.
You can trade down to a cheaper house. But the stamp duty and other costs makes this an expensive option.
You can borrow from your children against their inheritance.
You can go to a commercial operation like Residential Reversions or the Bank of Ireland. These schemes are inflexible.
Draw down mortgages
DECISIONS ON RETIREMENT
REDUCED PENSION AND A LUMP SUM OR THE FULL PENSION?
When you retire, you will be faced with a few decisions. If you are in a company scheme, you will be offered a choice of a pension of say, 2/3 rds of your salary or Half your salary and a lump sum. Invariably, you are better off taking the lump sum and the reduced pension. The pension is taxable whereas the lump sum is usually calculated to be tax free, so you should take the maximum lump sum available.
ARF OR AN ANNUITY?
You may have a choice of putting the proceeds of your pension into an Approved Retirement Fund or you might buy an annuity from a life insurance company which guarantees you a pension for the rest of your life.
As a general guide, you are probably better off going for an ARF. You can invest an ARF in equities which will give you the best return over the longer term, whereas an annuity is calculated on the return from Government Gilts.
SHOP AROUND FOR AN ANNUITY
Just because Irish Life managed your pension funds while you were saving, you may not be obliged to buy a pension from Irish Life. You might be able to take the fund and get a better quotation elsewhere.