The importance of understanding pension options, and retirement planning

As you get older, compound growth – like gravity – is no longer on your side. Nevertheless, just as a light jog or eating kale can improve your health, retirement planning at this stage is about making the most of what you have, rather than ruefully regretting all the mistakes you make earlier on. The choices you make in the various stages of retirement may be crucial in determining your long-term wealth. 

The old model of retirement was that investors would squirrel away capital after the kids had left home and the mortgage was paid off to build up their pension pots. That approach is more difficult for today’s aspiring retirees. Children are busy boomeranging home after university, and high house prices make mortgage freedom a rarity. The date when you can finally get round to some serious pension saving is pushed later and later. 

The practical approach to retirement

A more practical strategy is to make sure the portfolio you have is working as hard as it can be. This is particularly important in the run-up to retirement. While your instinct may be to target lower risk assets as retirement looms, the danger of moving too early is that you constrain the growth of your portfolio and leave yourself with less inflation protection. Even over 10 years, the difference between a £100,000 pot growing at 5% and at 7% is £164,700 versus £200,960 . 

Growth is important not just for its own sake, but for the protection it provides from inflation. It is a depressing reality that your lifetime savings need to run just to stand still. According to the Bank of England, goods and services that cost just £10 in 2000 would now set you back £25.55. Your savings will have needed to grow 155%, or 2.6% a year, just to buy the same amount. 

Maintaining stock market exposure in the run up to retirement also means you can align yourself with major growth themes across the world. That might be high growth emerging economies such as India or the technology supply chain across Asia. It could be the Latin American commodities cycle or in the UK, it might be the growth of dynamic smaller companies. Companies aligned to these pockets of structural growth are likely to be able to grow faster than their peers, and the broader global economy. 

However, it is also important that any growth strategy is carefully managed. While younger investors can get away with a few missteps, older investors don’t have the same time to recover. Growth needs to be properly diversified across regions and sectors. It is also important not to pay too much. Fantastic companies can be poor investments if the price is too high. The managers on the Aberdeen Investment Trusts range ensure that growth is not coming from a single source, and that they are paying the right price for the risks they are taking. 

For growth, investment trusts have a strong case for inclusion in a portfolio. Investment trusts are long-term investment vehicles. Their closed-ended structure means that the investment manager doesn’t need to worry about the disruptive effects of inflows and outflows from the fund, but can focus on finding compelling long-term ideas for growth. 

Transition to retirement

Income is likely to become more important as you transition to retirement. For many, retirement will be a process rather than a point in time and they may need supplementary income before they start their pension planning in earnest. Investment trusts may have a role to play here as well. The investment trust structure has certain advantages in delivering a consistent, reliable income to investors. Many investment trusts have an explicit mandate to grow their dividends over time and will be held to account by their boards. 

The rules for investment trusts allow managers to reserve up to 15% of the annual income generated by investments held within the trust. This means managers can reserve income in boom times, to pay it out in more difficult periods. This has allowed many trusts to pay a consistent, growing income to their investors. The Aberdeen Equity Income Trust and Murray International, for example, have 25 and 21 year histories of increasing their dividends every year. 

For investors looking towards retirement, this is a useful combination. They can have a reliable income stream that grows in line with inflation, while maintaining exposure to the stock market. This keeps the growth engine of a portfolio intact during the transition to full retirement. 

In retirement

At retirement, many investors will choose to switch into an annuity or fixed income holdings that deliver the core of their retirement income. However, these may not rise in line with inflation or deliver any long-term growth. For many people, retirement can run to 20-25 years and retaining some growth in their investments is important to keep pace with rising costs.

Stock market investments have often been seen as too risky for retirees. However, a consistent income can cushion the impact of any stock market volatility, and most retirees will still have time to ride out short-term setbacks. Maintaining some growth in a retirement portfolio can help with areas such as care costs, if they become necessary, but also may help leave a larger inheritance for the next generation. With this in mind, investments that prioritise stable income and growth have a place in later life retirement planning. 

Whether it’s an ambitious bucket list, care costs, or twenty-something children still at home, your later years can be expensive. You can give yourself a head-start by incorporating growth assets in your retirement planning. Investment trusts provide carefully managed growth and income that can be a useful addition to a pre- and post-retirement portfolio. 

Important information

Risk factors you should consider prior to investing:

• The value of investments and the income from them can fall and investors may get back less than the amount invested.

   

• Past performance is not a guide to future results.

   

• Tax treatment depends on the individual circumstances of each investor and be subject to change in the future.

   

• If you require advice please speak to a qualified financial adviser.

Other important information:

Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG, authorised and regulated by the Financial Conduct Authority in the UK.

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