‘The alarming decline in worldwide retirement provisions and the ever increasing deficits in both government and private pension schemes will inevitably lead to a reduced income stream for those reliant on their pensions to fund retirement income.’
Many individuals are still in a state of inertia with regards to their retirement planning following the financial fiascos and scandals of 2008, 2011 and still to date, so many are reluctant and indeed fearful to move out of cash deposits. Consequently with interest rates in many cases below that of inflation this problem is now being compounded the longer it goes on.
In many cases, pension/retirement money has not been allocated correctly to reduce the risk of loss or sudden and protracted falls in value at a time when an individual may not have the ability to recover losses. Taking an income from a pot that is already in valuation decline is a sure fire way to very quickly erode capital reducing income levels even further.
I am constantly amazed at how aggressively allocated some pension plans are and often see those in their sixties who are or will be heavily reliant on their pension income to pay living expenses, but with nearly 100% of their schemes invested in only two or three boutique ‘alternative’ funds. Often such funds hold illiquid physical assets (commercial property for example) with little regard to the market and institutional risk inherent within.
In some cases, investors are actually doubling up on their exposure to high risk assets to recoup earlier losses and thus invite further portfolio erosion, not to mention taking on added personal stress at a time when they should be enjoying their retirement!
Modern portfolio theory
A correctly structured pre or post retirement portfolio would usually consist of many different asset classes that are not directly correlated to each other – meaning that they don’t all go up or down at the same time in sympathy with each other and by broadly the same amounts.
Using non correlated asset classes spreads risk away from over reliance in any single sector or institution, adds diversification, and can enhance overall returns with significantly less volatility.
STOP Press – QROPS UK Pension Schemes Update!
Unexpectedly in December, HMRC (UK tax office) introduced a new statutory instrument to come into effect from April 2015 that seeks to align the regulations for overseas pension schemes including QROPS, with the changes introduced in the Taxation of Pensions Act 2014. Although still under consultation it will likely proceed, and will present pension holders with important choices to make.
The main point therein is that the current requirement for 70% of a tax relieved fund to provide an ‘income for life’ is removed – ergo, those individuals of any nationality with existing QROPS UK Pension schemes could in theory be able to access all of their accumulated fund as a cash lump sum at age 55 if they chose to do so. Some will no doubt be tempted by this new facility but seeking specialist advice is essential here, as any funds withdrawn in excess of the usual 30% tax free allowance could be subject to income tax rates of up to 40% thereby reducing retirement income even more – see paragraph 1!
By Jerry Dingley
Jerry Dingley has been advising expatriates & international investors in the Asia Pacific region for 25 years. Specialist areas include expatriate retirement schemes, family trusts, inheritance planning, wealth protection vehicles, private client portfolios & QROPS UK Pension transfers.