Freedom is great but it also brings complications. Decisions, decisions. Pensions freedom means savers can put money in their pensions plans and only draw down the amount when they need it. Previously everyone was forced to buy an annuity on retirement. With interest rates nailed to the floor, this meant even large-seeming pension pots produced only tiny pensions. It was always possible to take 25% in cash on retirement tax free, and it still is, but the annuity available on the rest will now typically only pay about 3% per year, for people in their mid-60s, if the annuity is to rise with inflation. Leaving the annuity till later or taking a chance on inflation will give a higher figure, but only modestly.
The SIPP, the self-invested pension plan, is a great solution. Funds remain invested and generating a return instead of being forced into the low yielding bonds used to fund annuities. Under current rules a person can typically invest £40,000 per year into their plan. It can be made directly into shares or more conveniently into a managed investment fund. Drawing down the funds after retirement is as selling a share: just a click or a phone call. The SIPP rules themselves do have some complicated wrinkles for people on higher incomes. But provided your total income, including any pension contributions made by an employer, is under £240,000, then the £40,000 allowance is safe and can be used each year. Above that level it starts to get clawed back, eventually falling just £4,000 when income reaches £312,000. It is best to avoid taking money from any pension investments until contributions have ended, otherwise a tax penalty can be applied.
Why bother with pensions anyway? The main reason is to move your taxable income from your years of higher rate taxes to later ones when your marginal tax rate is lower. Capital gains are also tax free whilst within a pension wrapper as well as income received from dividends. The government adds an amount equal to 25% on the money invested. This is the same as returning the 20% basic rate tax deducted under PAYE. Higher rate tax can also be reclaimed via the tax return, taking the full relief up to 45% if that rate was reached. In Scotland the maximum relief is 46%, reflecting the 1% higher top rate there.
Some people feel they should have a steady dividend when they retire, money they can spend and not worry about their capital dwindling away. Paying a dividend is a statement of confidence by a company, but sometimes it becomes merely a crutch to support a weak share price. It is better to choose companies for their total return rather than their dividend. Accounting measures of return on capital are a better guide to share price performance than historic dividend yields. In the Slater Growth Fund we select companies offering growth at a reasonable price. Markets go up and down but we keep a close eye on the forecast price earnings ratio in relation to the rate of earnings growth. High growth can support a fancier valuation. Static or declining businesses may look cheap but can in fact be value traps. Watching the relationship between earnings multiple and growth helps a lot in both cases.
Risk Warning: Past performance is not necessarily a guide to the future. The value of investments and the income from them may go down as well as up. Investors may not receive back their original investment. The Slater Funds have a concentrated portfolio which means greater exposure to a smaller number of securities than a more diversified portfolio. Charges are not made uniformly throughout the period of the investment. The Slater Funds invest in smaller companies and carries a higher degree of risk than Funds investing in larger companies. The shares of smaller companies may be less liquid and their performance more volatile over shorter time periods. The Slater Funds can also invest in smaller companies listed on the Alternative Investment Market (AIM) which also carry the risks described above. The Slater Funds may invest in derivatives and forward transactions for the reduction of risk or costs, or the generation of additional capital or income with an acceptably low level of risk which is unlikely to increase the risk profile of the Slater Funds significantly. This document is provided for information purposes only and should not be interpreted as investment advice. If you have any doubts as to the suitability of an investment, please consult your financial adviser. The latest Key Investor Information Document and Prospectus are available free of charge from Slater Investments Ltd. You are required to read the Key Investor Information Document before making an investment. Telephone calls may be recorded. Slater Investments Ltd is authorised and regulated by the Financial Conduct Authority. Slater Investments Ltd address is Nicholas House, 3 Laurence Pountney Hill, London, EC4R 0EU.