Rising inflation, rock-bottom interest rates and an ever-fluctuating equities market mean that building a sufficient retirement pot is proving more and more difficult.
But for most UK investors, having enough funds to see them throughout their retirement whilst maintaining their current lifestyle is a core investment goal.
Because of this, the traditional 60:40 portfolio split – which pairs higher risk, higher growth equities (60%) with lower risk, lower return bonds (40%) – may no longer be the most effective retirement planning route for experienced investors.
On top of this, the annual pension allowance can be restrictive for some high-net-worth investors in particular. As of 2021/22, the annual pension allowance is £40,000, but the pension taper introduced in 2016 means anyone with a threshold income of over £200,000 and an adjusted income of over £240,000 per year will see this reduced.
Therefore, it could be time for experienced investors with the appropriate risk appetite to consider adding alternative assets to their retirement portfolio, improving their opportunities to target inflation-beating potential returns that could help to set them up for later life.
Using alternative investments to boost potential returns for retirement
With the Consumer Price Index showing inflation at 2.4% in the 12 months up to June 2021 – whilst the Bank of England base rate remains at a record low of 0.1% – and the FTSE 100 seeing £44 billion wiped off its value on 19th July 2021 amidst fears around surging COVID-19 infection rates, investments uncorrelated with both the base rate and the fluctuations of the equities market are looking increasingly attractive for those looking to boost their retirement pot.
From early-stage venture capital through to property bonds, there are alternatives to traditional stocks and corporate bonds that have the potential to make a significant difference to the yield potential of a retirement portfolio.
Whilst most gilts and corporate bonds often target rates below 1% – significantly below the current rate of inflation – fixed-term, asset-backed property bonds can target inflation-beating returns of between 4% and 8% for experienced investors looking for alternatives to traditional bonds with higher growth potential.
Though these higher interest bonds are typically accompanied by higher risks when compared to lower risk options such as Government bonds, when held alongside those ‘safer’ bond options they can help to build a balanced retirement portfolio that will allow experienced investors to target more considerable gains when saving for later life.
Many property bonds also boast the ability to make interest payments on a regular basis - such as quarterly – though this will differ on a provider-to-provider basis. Whilst returns can not be guaranteed, the option to receive these potential returns at regular intervals opens up opportunities for a steady stream of income for those in retirement.
Furthermore, whilst the age that you can typically start withdrawing money from a private pension currently stands at 55, no such age restriction exists when releasing returns from a property bond, which could be particularly beneficial for experienced investors looking to retire early.
Using tax-efficient vehicles to supplement your retirement pot
Unlike the decreasing pension allowance, the annual ISA allowance has been on the increase since its introduction in 1999 – now at £20,000 for the 2021/22 tax year.
Because of this, it could be an important consideration for experienced investors to include an ISA in their retirement plan, and the Innovative Finance ISA (IFISA) in particular allows investors to hold alternative assets such as property bonds and SME loans, benefiting from both the higher potential returns when compared to mainstream assets and the tax-efficient ISA wrapper.
Though pensions are still the most tax-efficient method of saving for retirement – with tax relief of 20% for basic-rate taxpayers, 40% for higher-rate taxpayers and 45% for additional-rate taxpayers – using an IFISA to supplement their pension pot could help experienced investors significantly maximise their retirement fund.
This is especially evident when considering that to achieve a return equivalent to 7% within the IFISA wrapper (a rate often targeted by property bonds), investors would need to be targeting a return of over 12% outside the wrapper.
In addition, for experienced investors willing and able to take more control over their pensions, there are pension vehicles such as the Self-Invested Personal Pension (SIPP) and Small Self Administered Scheme (SSAS) which allow them to do so and also often allow the inclusion of alternative assets.
Using a SIPP or a SSAS for retirement planning enables investors to hold a number of alternative investments that are not permitted in more traditional pension schemes – including property bonds – pairing the typical, generous pension benefits with the high-growth potential of alternative assets.
Using alternative investments for retirement planning
With higher earners facing cuts to pension tax relief over the years, it’s unsurprising that they may be looking for different, higher growth methods of saving for retirement.
And with opportunities to hold alternative investments in tax-efficient vehicles such as the IFISA, SIPP and SSAS, their potential to provide a much-needed boost to experienced investors’ retirement income becomes even more apparent.