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The asset classes to own for retirement

04 October 2022

Independent financial advisers share their recipes for retirement in the current climate.

By Matteo Anelli,

Reporter, Trustnet

In the recent market turmoil, few asset classes (if any) seem to be able to provide peace of mind to investors. The traditional 60/40 split between shares and bonds is increasingly perceived as inadequate and some asset allocators are prioritising liquidity to protect capital from erosion and to be able to catch opportunities when they might appear.

For people in pensionable age, the present situation could mean different things according to what stage of retirement they are in, as explained in a recent Trustnet feature.

Expanding on that, Trustnet put itself in the shoes of those considering retirement today and asked four independent financial advisers which asset classes they would want to own if they were retiring today and why.

Below, their stances on cash and gold, infrastructure, and real estate.

With gilt yields rising, the obvious thing to do is to buy an annuity.

Kim Barrett, chartered financial planner at Barretts Financial Solutions, explained how things had been working swimmingly using drawdown (the ability to access 25% cash tax-free from your pension pots and leave the rest invested) until the events of this year have turned everything on its head.

“Sadly, all of our client reviews this year are producing negative results up to circa 15%, although these are compensated by last year’s results,” he said.

“If a client is wishing to continue in drawdown, cash is an obvious place to put pension assets to cover off income needs for, say, a two-year period. We are currently running very high cash positions for many of our clients in any event, both as an asset class of defence and to provide a nimbleness to reallocate funds if necessary”.

But rising gilt yields you are also forced to look at things in a more out-of-the-box fashion, including looking at taking out an annuity.

“Yield rising means that annuity rates are also rising, so the obvious thing to do for a cautious character is to protect ongoing income flows by buying an annuity, possibly adding flexibility with a fixed term annuity,” he said. “Other than that there is no magic panacea you can think of currently as all assets are falling at the current time.”

While some may look to gold, an area covered by Darius McDermott yesterday, he argued that the physical asset is not flexible enough to respond to ongoing income needs.

If investors were to go down this route, Barrett said he would “far rather buy a gold exchange traded fund (ETF) as this can be disinvested in part to deal with income needs,” but noted that the asset price is volatile and therefore not something he personally recommends.


Infrastructure has become an investable asset class for retail clients

Investment manager at EQ Investors Andrew Rees has changed the way he reduces risk for his clients as retirement approaches.

“Once a client retires and begins to draw down from their investments, we will typically move to a diversified portfolio consisting of 50% diversified global equities and 30% investment grade bonds being a mixture of government (both inflation linked and nominal), corporate and ABS (asset back securities).

“However, the final part has changed significantly since I began managing portfolios as we have seen the alternatives part of the investment toolbox expand. Historically alternatives would be hedge funds, gold, and commercial property but now we have seen infrastructure become an investable asset class for retail clients.

“We now hold between 10% to 15% in infrastructure for our clients and this consists of renewable energy, social infrastructure, battery storage and finally digital infrastructure.”


Market downturns help regular contributions and one-off lump sums

Chartered financial planner Susan Hill of Susan Hill Financial Planning, is of the view that fact finding and understanding your objectives is key to how to invest.

“Assuming someone needs positive returns over inflation and has more than 15 years to retirement or a need to take income drawdown, then they need to invest with the highest risk they can manage to achieve that objective. Then it is about what growth do they need to achieve that income, where growth can be from investment growth but also by contribution growth (putting more in).

“Market downturns that we are currently experiencing help regular contributions and one-off lump sums as they are buying into funds at a market low, returns come later in the market cycle.”


Property, property.

Adele Forbes, managing director at West Yorkshire Money, said another area that investors may want to consider is to invest in property, rather than into shares.

Buy-to-let landlords are coming under increasing pressure, but there is still the potential to retire on the income if invested correctly.

She said an ideal scenario would be to pay off the mortgage on a primary residence “and own a few rental properties outright receiving a few thousand per month.”

However, she noted that investors would ideally also need “a decent pension pot of at least £3,000 a month until death” to supplement this, should the market fall or any houses be left vacant for any period of time.

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