High earners can feel hemmed in by continued tax raids pension savings, but by thinking outside the box they can find ample tax-efficient routes maximise their retirement savings.
If you missed the scramble for NS&I pensioner bonds, there are investment alternatives if you take proper financial advice, explains Wendy Spires.
News abounds of websites crashes and jammed switchboards as investors clamour to access the market-beating bond rates on offer.
It’s easy to see why savers are piling in. At a time when interest rate offers of as little as 1.7% a year are enough to garner headlines, what are officially known as the 65+ Guaranteed Growth Bonds offer a return of 2.8% for one year or 4% for those willing to lock their money in for four years. They therefore offer investors an extremely welcome refuge for their money during a period which experts are calling one of the bleakest ever for savers. While it was hoped that the impending launch of the new NS&I bonds would encourage institutions to come out with more competitive rates, actually the opposite has happened.
Since the start of the year banks have slashed the rates offered on hundreds of savings accounts, fixed-rate bonds and ISAs – in many cases by as much as half. One interpretation being made much of in the financial press is that institutions knew that they wouldn’t be able to compete with the new bond offer and so decided to slash their rates in order to reduce the increases which will be necessary when the bank base rate eventually rises.
The 65+ Guaranteed Growth Bonds were unveiled on 16 January and in their first two days attracted an incredible £1.153bn from over 65s. So, while £10billion has been set aside for these bonds, the frenzy they have sparked has led to predictions of a sell-out as early as the beginning of February. Despite their best attempts to get their orders in for these must-have saving instruments, it seems likely that many retirees are going to be disappointed.
Those who are unable to access the new pensioner bonds should not be despondent, however. The rates available are undoubtedly market-leading when compared to what banks and building societies have on offer, yet even these NS&I rates of return could start to look somewhat anaemic if investors take a broader view of their investment options. Those with a significant chunk of money to invest and who can take a medium to long-term view – just the sort of individuals who are vying to buy pensioner bonds – could find that a wealth manager could make their cash work a whole lot harder.
Affluent individuals who engage a wealth manager get a personalised investment strategy – one that is intended to deliver the desired level of returns for an acceptable level of investment risk over whatever time horizon their financial objectives dictate. Correspondingly, it would be inappropriate to pronounce on precisely the level of returns an individual working with a wealth manager can expect to receive. That said, it’s safe to say that the professionals generally set their sights considerably higher than a 2.8% return a year.
The level of returns a wealth manager can aim to achieve through investing your money depends on a number of factors, such as your capacity to take on risk; it also goes without saying that expected returns are just that. However, wealth managers will typically seek to deliver performance in the region of 6-8% a year for their clients and, with annual management fees now coming in at just 1-1.5% of assets at many firms, the net gains a professional firm can offer are compelling.
Of course, the prospect of enhanced returns is the reward investors get in exchange for taking on a degree of additional investment risk. The key thing to remember, however, is that we are talking about degrees of risk.
Without doubt, the pensioner bonds investors are going wild over do represent an attractive return on a very safe type of investment, since the chances of the UK government defaulting on its debt are (we hope) vanishingly small. Yet investors need to remember that these bonds are really a government-backed “special offer” in the current environment, rather than the norm.
There is a whole spectrum of risk-return profiles high net worth individuals can access through various asset classes and financial instruments – from cash, gold and triple AAA rated bonds at the one end through to private equity, hedge funds and leveraged derivatives at the other.
While it is always wise to keep a keen eye on investment risk and to keep within bounds suitable for your circumstances, it also needs to be said that being overly risk-averse can be self-defeating – particularly when over the longer term inflation will be eroding the buying power of your capital. Striking the correct balance between risk and return is key to achieving your financial goals and so it pays to explore all your investment options with a professional. You don’t have to step too far out of your comfort zone at all to hugely increase the returns you can achieve and really the numbers speak for themselves. There is, for example, a very good reason equities are consistently the asset class our users are most interested in: the 2014 Barclay Equity Gilt Study found that shares have outperformed savings, bonds and gilts over one, five, ten and fifty years!