You can’t really start thinking about retirement too early, but for many people, reaching 50 is something of a wake-up call. Not for nothing is it the age known as The Big 5-O, or as we prefer to call it, The Big 5-Oh – as in…” Oh, I need to start planning and investing for retirement”.

Our previous article 8 steps to Smart Retirement Planning focused on the retirement journey. Once you’ve worked out where you are now and what you’ll need, it’s time to take a closer look at specific investments for retirement.

SIPPs

Self-Invested Personal Pensions (SIPPs) are the first choice of many when saving for retirement because they offer both flexibility and control and are tax-efficient for most people. In particular, if you are self-employed or change jobs frequently, then look closely at SIPPs. That said, SIPPs have increased in popularity even among those with traditional pensions.

Unlike traditional pensions, which generally only offer a limited number of investment options, with SIPPs, you choose what to invest in and when. That includes equities, bonds, multi-asset funds or investment trusts. You can even hold property within a SIPP. You can also make changes quickly and easily at any time – with traditional pensions, there are more likely to be restrictions.

With a SIPP, you can make regular or lump sum contributions to suit your budget and your current circumstances, stopping and starting contributions whenever you want.

You can also keep paying into a SIPP until you’re 75 if you choose to. However, like other pensions, you can’t make withdrawals until you’re at least 55. And as with other pensions, you’ll receive pension relief for contributions of up to £40,000 a year (under current allowances) and can withdraw up to 25% tax-free when you retire.

ISAs

Individual Savings Accounts (ISAs) are generally an attractive and tax-efficient way of saving, with a Stocks and Shares ISA usually offering the most long-term growth potential. (If you’re under 40, then a Lifetime ISA is also worth considering.) As a result, many people choose to invest in ISAs alongside a pension – some even prefer to use ISAs alone.

ISAs allow you to save up to a certain amount tax-free each year – currently £20,000. They’re also flexible – although they should be seen as a long-term investment, it’s easy to take out money at any time, should you need to, and you can receive dividends. Another plus is that any income or increase in the value of your investment is also tax-free. However, you don’t get tax relief on the money you put into ISAs, as you do with pensions.

Equities

Whether you opt for ISAs, a SIPP or another approach, there are plenty of choices when it comes to investing for growth. For your pension pot to last a long time (20 years or more), you’ll want to try and get it to grow. Equities (stocks and shares) generally offer the most growth potential, although they tend to be more volatile.

For convenience and to broaden the risk, you may prefer to invest in multiple equities under a single umbrella – an equity fund. You could also choose multi-asset funds, which invest in a range of asset classes, including equities, bonds, and commodities.

What’s important is that you consider carefully how and where your money will be invested, and that you’re comfortable with the amount of risk you’re taking.

Bonds

If you’re nearing retirement or are retired, income generating investments such as bonds could be a great option for your pension pot. However, bonds have a drawback – they have traditionally returned less than equities.

That said, there’s a wide range of bond markets to invest in, and you can easily tailor your choices to the amount of risk you’re prepared to take. Safest of all are generally government bonds and gilts, but these also commonly deliver the lowest returns. Higher up the scale, we have high yield bonds such as emerging market debt which is riskier but has the potential to produce higher returns compared to government bonds or gilts.

If you invest directly in bonds, as opposed to within a pension, you have the freedom of choosing how long to invest for, and of receiving regular interest payments. But as with other non-pension investments, the temptation is to spend rather than save the money.

Investment Trusts

Investment trusts are collective investment funds that let you invest in a wide range of companies or assets in a cost-effective way – charges tend to be lower than for other stock market investments.

If you combine different trusts with varying sector/regional exposure, they can also be a good option for weathering market fluctuations. For example, UK investors who had diversified portfolios generally fared better during the turmoil caused by the pandemic compared to those who were focused on the domestic market.

Investment trusts also have an independent board responsible for safeguarding investors. This helps protect investors from poor management. Many trusts provide a stable and reliable dividend, although these would need to be re-invested if part of a pension.

At Janus Henderson, we have a range of 12 different investment trusts, with total assets valued at £9.3 billion.[i] We invest in a wide range of countries, sectors, and assets to provide investors with choice, diversity, and opportunity. Whether you’re looking for capital growth or income (or a blend of both), there’s a wide range to choose from.

Property

Many people look to their home to help fund their retirement. If you have the cash to do it, it’s generally worth paying off your mortgage as soon as possible.  Many people choose to downsize in retirement, which can generate significant amounts. However, this is unlikely to be sufficient to fund more than a few years of retirement.

If you don’t want to move, then releasing equity is another possibility – you can either borrow against your property or part sell it in order to obtain money. However, there are limitations to these approaches, and they will also affect your legacy. Always seek professional advice before opting for equity release.

Other options include buy-to-let property, although changes to tax and other regulations have made it less profitable in some instances. Some people also buy property, refurbish it, and then try to sell it for a premium. Again, this can be a good way of making money, but the effort involved, and the uncertainty of the market can make it less suitable in the long-term. Liquidity is also one of the biggest issues with property, and, if you’re depending on rental income alone, it may not be enough to bring you the income you need.

Businesses

If you already have a business, it can be a significant asset, but there are many variables to consider. In particular, be wary of relying on optimistic projections and using them as forecasts to fund your retirement. A great deal can happen in a time period of 20, 30, 40 years or more.

You can also invest in other people’s businesses, or start up a new one of your own, but these options are even more uncertain. Their value in the future – and your ability to take money out of them – is a big unknown.

Other investments

Alternative assets have always been around but have become more popular in recent years. For instance, some people like to invest in precious metals like gold and silver, especially in times of uncertainty.

Many alternative assets have proved capable of delivering impressive returns. But at the same time, their value has fluctuated greatly, so you should be cautious of depending on them for long-term retirement funding.

Other asset classes include antiques, art, wine, stamps, and classic cars. With all of these, expert knowledge is essential, and markets are prone to considerable fluctuation.

Another downside is that without dividends, you tend to have to sell some or all of your assets to achieve a return.

Choosing the right investments to fund your retirement

Most people are likely to want some combination of the above approaches – diversification is often a good strategy.  But working out the best investments for retirement is only part of the story, of course. You’ll need to ascertain which investment strategies work best for you – taking into account your goals – how you can successfully implement them within your ISA, SIPP, or pension.

Remember too that with increased life expectancy, you could be retired for 20, 30, 40 years or more. What’s most important is that you don’t run out of money. A financial planner can help you work out a lifetime cashflow plan, but when it comes to deciding on individual investments, an independent financial adviser (IFA) is a better option.

Find out more

For more information on investment choices and the steps you should take for smart retirement planning and investing, you can download our Retirement Guide. There’s lots more information on our Retirement Planning Hub.

¹ Source: AIC as at 30 September 2021