Pension alternatives: what are the best options for savers?

With record increas­es in house prices, it could be tempt­ing to fund your retire­ment through bricks and mor­tar, rather than a pen­sion. But with experts pre­dict­ing a flat­ten­ing hous­ing mar­ket this year, is it time to con­sid­er alter­na­tives?

In recent years, surg­ing house prices have cement­ed the appetite for prop­er­ty invest­ing. Buy-to-let oppor­tu­ni­ties have been a par­tic­u­lar focus, offer­ing both rental yield and cap­i­tal for those will­ing to play land­lord. 

Why prop­er­ty? Unlike pen­sions, it offers tan­gi­ble assets that are often eas­i­er to under­stand. How­ev­er, if the mar­ket cools, those attrac­tions could dim. 

Still, putting all your retire­ment eggs into the tra­di­tion­al pen­sions bas­ket can seem rather unam­bi­tious. With life expectan­cy on the rise, high­er infla­tion and the risk of below-aver­age stock mar­ket returns, those who choose this route may find they have less to live on than they’d hoped. 

Luck­i­ly, there are alter­na­tives to con­ven­tion­al assets to help fund the gold­en years with­out the need to rely sole­ly on draw­down or annu­ities.

Among the alter­na­tive assets that have per­formed well in pre­vi­ous infla­tion­ary envi­ron­ments are com­modi­ties and hedge funds. Both have proved to be “a good port­fo­lio risk mit­i­gant” in uncer­tain times, says Tom Kehoe, glob­al head of research at the Alter­na­tive Invest­ment Man­age­ment Asso­ci­a­tion

How­ev­er, some investors might pre­fer to look else­where. Hedge fund investors need to lock their mon­ey away for some years, while com­modi­ties are fair­ly volatile, par­tic­u­lar­ly at a time of height­ened geopo­lit­i­cal ten­sions.

Collecting wealth

The lure of trans­form­ing a life­long pas­sion for fine art, vin­tage cars, rare coins, stamps or whisky into a bank­able col­lec­tion may hold appeal for some, rather than chart­ing the vagaries of the prop­er­ty or stock mar­kets. These assets can be bor­rowed against or sold, or even sim­ply enjoyed. 

But while it may be sat­is­fy­ing to own a Banksy or a vin­tage Fer­rari, col­lectibles too are illiq­uid assets. It can be tricky to dis­pose of them if need­ed, while they can attract high costs and fees. The ever-present threat of coun­ter­feit­ing is also a wor­ry. 

How­ev­er, a basic lack of knowl­edge pos­es the biggest dan­ger for any investor look­ing to tie up large swathes of their retire­ment pot in rare coins, cars or dig­i­tal assets.

“We steer our clients away from more than 90% of the pic­tures they want to invest in because as experts, we know they will not give them the returns they are look­ing for,” says Philip Hoff­man, founder of the Fine Art Group, which rep­re­sents some of the wealth­i­est art col­lec­tors in the world. 

While some devo­tees will put up to half of their retire­ment assets into art, his com­pa­ny advis­es stick­ing to 5% or 7% at most, “and ditch­ing any notion of mak­ing a fast buck”.

For those who can lay their hands on a min­i­mum £75,000, Hoff­man rec­om­mends buy­ing one qual­i­ty art­work in favour of a col­lec­tion of low­er-qual­i­ty pieces. As long as an investor is pre­pared to hold the asset for a min­i­mum of four to five years, he believes returns can be impres­sive. 

Building assets

That’s not to say you should turn your back on prop­er­ty, of course. For peo­ple who pre­fer to enjoy their invest­ments every day rather than chart­ing their gains and loss­es on a screen, real estate can offer a far more vis­cer­al expe­ri­ence, despite being in the illiq­uid cat­e­go­ry.

“Prop­er­ty is often dis­cussed as an alter­na­tive to pen­sions, with the self-employed in par­tic­u­lar favour­ing it,” says Helen Mor­ris­sey, senior pen­sions and retire­ment ana­lyst at Har­g­reaves Lans­down. How­ev­er, while there’s been strong growth in the prop­er­ty mar­ket, it’s not immune to falls, she warns. “Rely­ing sole­ly on prop­er­ty to fund your retire­ment means you aren’t suf­fi­cient­ly diver­si­fied and if the mar­ket drops, then so will your retire­ment fund.”

When the cost of buy­ing and sell­ing prop­er­ty is fac­tored in – solicitor’s fees, ongo­ing main­te­nance and the poten­tial for cap­i­tal gains tax, not to men­tion the has­sle fac­tor – she believes that pen­sions can often out­per­form bricks and mor­tar. 

But whether you’re look­ing at pen­sions, prop­er­ty or paint­ings to help fund the lat­er years – either as a key invest­ment or an inter­est­ing side hus­tle – your cur­rent life stage should be a cru­cial fac­tor in your cal­cu­la­tions.

A key to suc­cess­ful retire­ment plan­ning is man­ag­ing liq­uid­i­ty at or near to retire­ment. While those with­in sight of fin­ish­ing work may be uncom­fort­able hold­ing too many illiq­uid assets, the liq­uid­i­ty pre­mi­um is like­ly to be far less of a con­cern if retire­ment is many decades away.

Diversity dividends

To Stephen Jack­son, exec­u­tive direc­tor and finan­cial plan­ner at the pri­vate bank Coutts, hold­ing a vari­ety of dif­fer­ent asset class­es is by far the wis­est approach when it comes to fund­ing lat­er life. He thinks it’s “unlike­ly that pen­sions alone can deliv­er suf­fi­cient retire­ment income to sat­is­fy most peo­ple,” due both to the lim­it­ed annu­al and life­time allowances and to chang­ing leg­is­la­tion. 

How­ev­er, alter­na­tive invest­ments have their draw­backs. Few can deliv­er a reg­u­lar and reli­able income in retire­ment and if investors need cash in a hur­ry, sell­ing fast and at a good price can’t be guar­an­teed.  

In con­trast, the gen­er­ous tax breaks offered by pen­sions still make them a high­ly effi­cient way to save for retire­ment, says Mor­ris­sey. “Being invest­ed in the stock mar­ket for the long term is the best way of deliv­er­ing infla­tion-beat­ing returns that will give you a resilient retire­ment income. Quite sim­ply, pen­sions take some beat­ing as a retire­ment plan­ning vehi­cle,” she says. 

While prop­er­ty and a pen­sion can deliv­er sub­stan­tial long-term growth, there are always oppor­tu­ni­ties and risks to con­sid­er. 

“Over­all, an invest­ment approach which com­bines a suit­ably diverse range of asset class­es, max­imis­es tax breaks along the way and pro­vides access to liq­uid­i­ty when need­ed, is like­ly to serve investors well in gen­er­at­ing suf­fi­cient funds to sup­port their retire­ment,” says Jack­son.