Protecting Your Pension From Inflation
Inflation proofing a pension in these days of low interest rates, erratic stock market performance and falling commercial property prices is a worry for a lot of investors.
The fact is everyone knows interest rates, taxes will rise - and inflation will wake up out of its slumber and start eating in to savings and investments.
Those most at risk are on fixed incomes like annuities, because once a pension fund buys in to an annuity, the contract cannot be switched to a better annuity or provider.
It's no good waiting until inflation starts nibbling at your savings to act - think about what you can do now to protect your money.
Seven financial tips to stave off inflation
Here are seven tips that can stave off the effects of inflation:
1. Keep liquid - cash or easily convertible assets can quickly be switched
in to safer investments like gilts that are index linked and produce a better
return in times of higher inflation.
3. In the past, long-term property holdings have always performed well as long as owners do not try to liquidate their assets in a downturn in prices. The real truth about property is the price clock has wound back to about 2002-2003 values. If you have letting property bought before then, you should still have reasonable equity providing the investment is not leveraged to the hilt. Those who bought after 2002-03 have a tougher time riding out the market until prices climb back to a reasonable level. Don't overlook the hidden costs of investing in property - like maintenance and rent voids.
4. Commodities - the famous saying is invest in land because no one is making any more of it. The same can be said for gold, oil and gas as more and more countries are calling on reducing reserves. Look to Brazil - massive oil and gas finds off the coast look to push the country in to the world's oil and gas producing top 10.
5. Emerging markets and currencies - risky investments but look at protecting your investments against currency exchange fluctuations that add to the inflationary slice of the pie to reduce your cash pot.
6. Increase savings at least in line with inflation - try putting a little more money away each year to bolster your account.
7. If you are retiring outside the UK or have amassed UK pension rights as a non-resident, a QROPS provides a lot of protection for your pension by providing a more flexible, low tax investment environment.
The fixed income problem of buying an annuity with your pension fund is stripped away as a QROPS plan has no requirement for an annuity purchase. Currency exchange fluctuations are minimised because a QROPS can invest in many major currencies and pay out in them, avoiding currency exchange issues.
QROPS v SIPP
If you are staying in the UK then a SIPP is probably one of the best retirement investment options available as long as the product is a true SIPP offering the member investment flexibility.
Many SIPPs are just as bad an effect on your retirement fund as inflation because providers enforce investment in their own low return funds, pay little or no interest on cash deposits and slap on penalty fees if you fail to use their solicitors or fund managers.
Of course, bad Qualifying Recognised Overseas Pension Scheme plans are out there as well, but generally, the products are more customer centric and have a more flexible investment policy.
Living overseas and drawing a UK SIPP does not resolve many retirement cash problems like currency exchange fluctuations, because they pay out in Sterling; investment options are less flexible and often linked to UK markets and funds and the fund is taxed at a higher rate than an offshore QROPS.
QROPS are not necessarily the answer for every pension problem and some people will have plans with benefits that they should not transfer, but pound for pound, a Qualifying Recognised Overseas Pension Scheme will weigh in and protect your retirement fund more securely than most other pension products if you are retiring outside the UK.