ISAs in Retirement
The best part of the great ISA retirement plan is when we come to the investment opportunities which continue during retirement, right up to the day the money is needed.
Long Term Investment
We have always looked on money which could be put away for a period of five to ten years or more, as long term investment. The significance of the five year minimum is that this is typically the shortest length of time we have been quite confident of making a positive return on the stock market, although in more recent times this has stretched to quite a bit beyond the minimum.
This means that when we are investing in our twenties, thirties and forties, we are considering the full range of investments, which for most people will be anything up to Far East and Emerging Markets funds.
For many people, their risk profile will fall well short of such speculative areas, sticking mainly to UK and perhaps European funds, and there are many more really scary investments at the full extent of the risk scale some of which are just a bit too dangerous for most of us to consider.
We know though, that historically at least, there is some degree of correlation, or association, between the degree of risk and the potential return. There are various reasons for this, not least the fact that people have to be tempted out of cash investments if there is to be any money available for business investment, and there has to be a reasonable chance of making a better return or the money would just lie, safely, in cash.
When investing for the longer term, therefore, we have access to a wider choice of investments, including those which have the potential to produce a greater return.
Short Term Investment
The opposite is true of short term investments. When we invest for a year or two, or three, we cannot be sure of completing at least one complete cycle of the stock market, so, if we need the money on a specific future date, for a specific purpose, we cannot afford to take the risk that we will be at the bottom of a cycle when we need to take the money out.
This means we are limited to investments which do not have such a degree of fluctuation, namely cash based investments. We have a choice of bank and building society deposits, cash unit trusts, cash pension funds, gilts (Government gilt-edged securities), National Savings, Premium Bonds and the like.
The one thing all these investments share is that the returns from them is usually lower than stock market based investements, typically by two to five percent per year, and this usually means they don't do a great deal more than keep up with inflation, perhaps a little more.
These are the investments which have typically been used in the run up to retirement, usually because of the need to purchase an annuity on a certain birthday, to provide the income needed when we are no longer working, so we lose five, and for the more cautious, nearer ten, years of potential additional growth in the run up to retirement.
Coincidentally, this is when we have built up all of our savings for our years of retirement, so we can have the greatest possible loss of potential growth on all that money, it is more or less sitting there keeping up with inflation, or thereabouts.
Retirement Investment
The amazing thing is, that having done that for five or ten years, we do exactly the same thing, or something very similar at least, in retirement. We say we need this money for retirement income, so we cannot afford to take any risk with it. That is quite true of course, very few people have too much pension, so they need all they can get.
This means we usually buy an annuity with the money, in fact it is almost always used to buy an annuity. There are ways of avoiding buying an annuity while still taking an income, and applying these longer term investment strategies to existing pension funds, which we will be happy to share, just contact us.
So, thinking back to the long term investment opportunities we had when we started investing, while in our twenties, thirties and forties, we are sitting with quite large amounts of money on retirement, with the prospect of enjoying twenty, thirty years, or more, to spend it.
This, coincidentially, is the same investment term as we were looking at in these earlier years, when we could choose anything within our risk profile, but suddenly we see it differently.
Some of that money could be sitting in cash for thirty years on this basis, without any appreciable growth at all, other than keeping up with inflation. But if we remember the investment principles, money we won't need for more then five to ten years can be exposed to some degree of investment risk.
So why aren't we investing it? At Scottish Financial we do, and we keep it invested for as long as is appropriate for our clients' needs.
The Retirement ISA
One easy way of doing this is just to leave it invested, adjusting the selection of investments to minimise investment risk as far as is required. This is the second reason for using ISAs for retirement planning. First we use ISAs for long term growth, then we keep using them for long term growth and income in retirement.
One aspect of this which may have been realised is that by staying invested, you don't have to cash in existing investments and change them to new investments, which usually involve a new set of administration charges by the new provider, you just leave them where they are.
