Deciding how to invest as a pensioner is a complicated business, and one that requires some thought.
Ideally, you should speak to a financial adviser – everybody’s situation is unique, and everyone will have an ideal level of risk/reward that they’re willing to work towards.
Here is some food for thought to start off your investment brainstorming.
Before we start, it is important to note that the most important thing you can do with your investments is diversify. Whether that’s owning lots of different kinds of stocks and shares, spreading your real estate investments over several countries, or putting your money into many completely different sectors, it is a foolish investor who puts all of their eggs into one basket.
Regular savings accounts
A regular savings account is a bank account into which you pay a certain amount (e.g. £200 or more) each month. In return, the bank may give you a slightly higher rate of interest than you’d get on a current account, although in the world of low interest rates, that is hard to achieve in practise.
The benefit of these accounts can be that the funds can be easily accessible if needed urgently, and usually there is no limit to the amount, unlike an ISA with it’s yearly cap.
An annuity is one choice available for a pensioner. It provides you with a guaranteed income on a regular basis, which pays out either for a fixed number of years or for the rest of your life.
You can choose for an annuity to pass on to a dependent or spouse upon your death. It can provide a good safety net for a retiree, so it may be worth putting some cash into annuities, especially if you qualify for a higher amount due to previous illness.
This excellent guide from Which? goes into detail about how they work.
An ISA might not be the first product you think of, but it’s worth considering. Tax-free savings can make quite a difference to your interest income. There are also some specialist savings accounts for older savers.
You can only save a certain amount in an ISA each year (a maximum of £20,000 in 2017/18). They come in a few different flavours. You can choose an easy access ISA if you’re worried about getting cash out in an emergency, or opt for a notice ISA and a slightly higher interest rate.
It’s also possible to draw an income if you have significant amounts in a stocks and shares ISA. Certain specialist funds can pay out monthly income, so it is worth doing so if an option for you.
Investment bonds are a good option if you have a lump sum to invest (at least £1,000 – often £10,000 minimum), and you’re willing to keep that cash tied up for a few years.
There’s lots of types of bonds provided by different companies with varying amounts of risk and terms, and include premium bonds, fixed-rate bonds, corporate/retail bonds, government bonds (gilts) and mini bonds.
Buying shares in a company (or several) can be an interesting and potentially rewarding way to invest, but it obviously comes with some risk.
Generally, shares pay out a ‘dividend’ to the investor, which is a portion of the company’s profits. Some shares, however, won’t pay dividends but will aim to increase your investment by increasing the value of their shares. Don’t fail to find out which kind of share you’re getting before you buy.
Capital growth on shares can go up as well as down, certainly in the short term. Don’t forget, though, there’s always the risk that the company could go bankrupt – cutting off your dividends and making your shares worthless.
Property is always a popular investment, but it’s not a short-term one.
To see real benefit from capital gains you need to be willing to have your money tied up for 5-10 years at least. Rental yields – realistic rental yields – top out at about 6% per year in the UK, and you’re more likely to hover around 3 – 4%.
One thing to consider, though, is a holiday home investment. This can be in the UK (e.g. Cornwall) or abroad (e.g. Marbella). Short-term lets, if done properly, can be a nice little money spinner – and this investment has the advantage of giving you somewhere to stay during your summer holidays, or somewhere to flee to when it’s miserable at home. Paying a property manager to take care of lettings will take the time commitment out of it.
However, this is only a viable option if you already wanted a second home, or you were going to be spending vast amounts of cash on holidays.
However, there are now other ways to invest into the property market, without being a landlord.
As we mentioned right at the start, everyone has a different idea of what the perfect investment portfolio looks like. Some readers will be more concerned with leaving a legacy than living the high life; others will enjoy the thrill of short-term, higher-risk investments. Whatever your leaning, be sure to professional advice if you are not confident with your finances.