Ensuring a comfortable retirement
A litany of global economic events over the last few years has many soon-to-be retirees worried. The pandemic, the cost-of-living crisis, interest rate rises, bond market turmoil and bank collapses, will all have impacted pension values. What affects your pension pot and how can you protect your future retirement plans with safe-haven investments like gold?
Market sensitivity
Pensions are very sensitive to economic turmoil. Any slump in stock and bond investment markets, which form a large proportion of many pension portfolios, will drag the value down substantially. Understandably, many people nearing retirement age are concerned about the impact this might have on their pension pot and retirement incomes.
At the mid-year point of 2023, stock markets are largely where they were a year ago, but there have been points of substantial volatility within the period, and a recession may yet loom large. The outlook for many companies is not assured. While some forecasts expect the UK to avoid a recession, the manufacturing sector contracted in July and the services sector, while positive, was only slightly so.
Other assets may also not provide much pension stability. Some people include property in their pension portfolio or rely on property income to top up their retirement, and this market is also under increasing pressure amid rising interest rates.
When these economic factors affect the value of pensions, younger investors may find their pension recovers over time. However, the effects of economic volatility could have a substantial impact on pensions destined to be drawn down in the next five years.
Bond Collapse
The UK economy may have largely recovered from the economic shock caused by the mini-budget in September 2022, but there have been longer-term consequences. At the time, usually low-risk UK government bonds took a hammering when former prime minister Liz Truss’s government announced their largely unfunded mini-budget spending spree. This forced the Bank of England to step in and calm the market, but the effect on pension savings has been widespread.
Pension investments for people nearing retirement age are often moved to ‘less volatile’ assets to ensure they don’t lose out if the stock markets decline. These safe assets included a preponderance of bonds, which plunged in value after the mini-budget, wiping out substantial value for soon-to-be retirees. Many didn’t have time to wait until the bonds recovered, and even now some large pension funds are facing up to a worsening funding position, which means the gap between their assets in the fund and the liabilities or obligations to pay out pensions is moving in the wrong direction.
A 25-year-old could cut their losses and buy into the market while it’s down, with time on their side to grow their investments from the ground up. But if the threat of a recession becomes a reality, it may be too late for people planning on retiring soon to recover any investments. Those closer to retirement will find the cost-of-living crisis has a substantial impact on when they can retire and how comfortable that retirement will be. Inevitably, those in this position are asking, “What can I do to minimise the impact of this storm on my retirement income?”
Derisking – the gold standard
As investors approach retirement age, it is prudent to swing the balance of assets in a pension portfolio towards the less risky end of the scale. Investments like government bonds, cash and gold are seen as offering a safe haven in troubled times (with a caveat to bonds following the crisis last year). Gold has historically maintained its value throughout periods of economic and political uncertainty. If managed in the right way, it can also be a very tax-efficient investment.
Gold’s relationship with other investments like stocks and property tends to be an inverse one, where a slide in the former prompts a surge in the latter. The correlation isn’t always absolute, because many things affect the price of gold and the volatility of the stock market. However, the majority of market declines have seen a flight to safe-haven assets like gold which have maintained or increased in value.
This relative stability against other assets is the reason gold bullion, gold bars and coins, are often used as a hedge to balance out an asset portfolio. This becomes more important the closer you get to retirement. In addition, gold removes exposure to the banking system and limits counterparty risk.
Gold investment history
The gold price over the past twenty years bears out the wisdom of this precious metal as a safe-haven asset. 20 years ago, gold was worth around $350 an ounce. Since then, the value of gold has risen, with some peaks and troughs over the years to over $1900 today. The peaks largely coincide with periods of uncertainty within the markets or shifts in global geopolitics, which correlate with gold’s safe-haven status.
Forecasts by analysts, investment banks and gold investors cover a wide range of outlooks, but many expect the price to continue to rise this year. Citi analyst Edward Morse told CNBC he predicts the price will rise to $2400 this year, while UBS analysts forecast $2,100 by year-end and $2,200 by March 2024.
How to Invest in gold in your pension
In 2006, the UK government allowed physical gold to be held in Self Invested Personal Pensions (SIPPs). The gold must be in the form of bars and a minimum purity of 995 out of 1000 (99.5% pure). The tax advantages of holding gold in your SIPP are that the government will provide tax relief between 20% and 45% depending on your tax rate.
The increase in the value of your gold over time is also accumulated free of capital gains tax, which in some instances can be as high as 28%. Not all SIPPs are enabled to hold gold so it’s worth checking which ones do ahead of any decision.
Another advantage of physical gold is that it is required to be held in a vault and sits outside the banking system, fully insured, regardless of how much is purchased. The current deposit protection scheme only covers assets up to £85,000 if a bank was to fail.
Finding a SIPP that allows gold investment
Only some SIPPs enable you to invest in gold within them, so this is the first step in the process of adding the yellow metal to your portfolio. Your own SIPP may allow or even consider permitting physical gold as an investment – you will have to contact them to find out.
Once you have a SIPP provider, take professional financial advice and then you can instruct your SIPP provider of your intentions to invest in physical gold within your pension.
Gold dealers cannot offer specific financial advice but a reputable dealer will be able to furnish you with procedural guidance. They can also help with facts about gold, its performance, what gold products are available and the timings of your gold purchase. Consider reputation, accessibility and security, do some research and ensure they can provide you with the right level of information you need. Are they able to explain the types of gold available so you can make an informed choice about what to invest in? Will they store it on a segregated and allocated basis instead of pooled storage? And importantly – will they offer a Buy Back Guarantee? It’s important that you are able to liquidate your gold quickly by having a guarantee from your provider to buy back any physical gold purchased from them.
Transfer funds from existing pension to SIPP
Once your new SIPP is set up, your current provider will send funds to your new SIPP provider. At this point, you fill in a form (an instruction to purchase) that permits the SIPP provider to purchase a certain amount of physical gold bars. Funds are transferred to your gold brokerage and you will run through with your broker the various sizes and denominations of available gold bars. It’s critical that any bars that are purchased are from LBMA providers. Once the allocation is complete – you are sent your paperwork (Transaction Invoice, Storage Agreement, Certificate of Authenticity) secure in the knowledge that you can sell at any point.
Diversifying your pension assets is a prudent move. For a comfortable retirement, holding safe-haven assets like gold will help to protect your future from volatility and risk.
