Financing the third stage

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Even if most people plan to continue to work in some form, investing for the later years of life remains very important. For many, income from work will be reduced - for example, if they work part time, or take on advisory rather than executive roles. Investment income, if any, will have to be used to meet the shortfall, to act as a safety net and to enable wealth transfer to subsequent generations.

Assessing the impact of the wealthy nevertiree 4 of 8 The problem of unpredictability 2 of 8

Residents of the United States, please read this important information before proceeding

Please read this important information before proceeding.

As discussed in the previous section, unpredictability is a concern for many. Few are confident they can predict investment returns, their health and a number of other factors. Overshadowing all these problems is the issue of life expectancy - rising steadily (and particularly rapidly for the wealthy) - but increasingly difficult to predict for the population as a whole.

Whilst it is possible to set down some basic requirements for the 'ideal' retirement investment - as below - some of these requirements are inherently contradictory. Varying priorities and needs can also put investors, governments and financial services firms at loggerheads. An investor's desire for tax efficiency, for example, runs counter to a government's desire to raise taxes, particularly on transfers of income. Additionally, an investor's desire for high returns could translate into higher risks and possible investment failure, which could put pressure on a government's desire to keep retirement savers from resorting to welfare after an investment has lost its value. Even if governments legislate for the provision of certain types of savings products, financial sector firms need to be able to provide them at reasonable cost - and without creating a major risk to themselves.

The 'ideal' retirement investment: five requirements

  • Safe. Investments need to be 'safe' from financial market collapses. But they also need to provide for an individual living for a long time.
  •  Decent returns. Returns need to be 'safe,' but still good enough to make sure the individual does not have to accept a lower standard of living.
  •  Tax efficient. An obvious one - but which some people do not pay enough attention too. There may be choices to be made between the taxation of income and capital.
  •  Flexible. Clearly desirable, if the individual has to meet unexpected expenditures. But flexibility must not preclude the investment's ability to provide adequate returns over a long period of time.
  •  Inheritable. If the investor dies prematurely, they may want at least some of their investment to be made available to their family. This is a particular problem sometimes with annuities or many forms of pension plans.

Recent policy debates about retirement savings reform have served only to underline the fact there will be no 'magic' answer to this problem. All methods of saving for retirement will require some degree of compromise, and will vary greatly according to individual circumstances. Nonetheless, it is possible to identify a number of key priorities for those considering how best to invest for retirement.

Phil Smith, Head of Financial Planning at Barclays UK and Ireland Private Bank, puts it succinctly:

  • First, he argues, start early. Even for a wealthy person, it can prove difficult to accumulate the necessary funds, in the most tax efficient structure, if you leave it too late.
  • Second, take advice, particularly in regard to taxes. There are a number of quite complex decisions to be taken. Should you, for example, invest through an offshore bond or other vehicle that may offer no tax relief now, but the ability to compound earnings tax free in the future? Or should you invest through a vehicle that provides immediate tax relief on contributions?1
  • Third, make sure that your investments are properly diversified.2 Mr. Smith argues that the financial crisis has underlined the need for a proper asset allocation - the division of assets between different asset classes.
    But has the financial crisis also made individuals more sceptical about an individual's ability to plan rationally for retirement? Are worries about unpredictability, as discussed in the previous section, discouraging individuals from thinking ahead?
    Matthew Brady, Head of Wealth Advisory at Barclays Americas, acknowledges that the financial sector crisis - and the resulting fall in asset values and real estate values - has had a profound effect on individuals' attitudes toward investment. But, he has in fact seen an increased interest in long-term estate planning, particularly from individuals in their mid-40s. He believes that individuals still try to make a rational calculation about what they need for retirement but - because of uncertainty - are having to add an extra amount for safety. Health and government policy toward health provisions remain a great uncertainty, and whilst individuals can take insurance against unforeseen health outcomes (i.e. the need for constant long-term care), this remains a source of concern.
    Mr. Brady also highlights the increasing role that taxes are likely to play in retirement planning, particularly if cash-strapped governments are forced into further increases to tax rates in the future. As he points out, the exact extent of such future increases is uncertain everywhere; at present, interest in the US is focused on the increases to tax rates already scheduled to take effect in 2011 and subsequent years.
    Raising taxes may encourage a focus on areas to which advisors to the wealthy have sometimes paid little attention. For example, although retirement accounts in the US are exempt from tax, the limitations on contributions have often meant that the account balances are relatively small for a wealthy person.
    In recent years, tax law changes and growth in such accounts have made them more of a focus for high net worth families. With significant additional income taxes coming into effect, the tax efficiency of such accounts is receiving substantial new focus. Mr. Brady thinks a search for tax-efficiency may also encourage a greater interest in insurance policies that are linked to investment products - for example, hedge funds (for the very wealthy) or mutual funds (for the affluent).
    Despite this, Mr. Brady thinks the focus will remain on careful planning and thinking through the implications of retirement, rather than a radical change in the sorts of financial products used to invest for it.
    Phil Smith adds: "There is a trend to pass on wealth to the younger generation who have not yet accumulated wealth. Trusts are a popular way to do this as they offer the opportunity to plan how much wealth is distributed - whether it be as a lump sum or regular income stream; whilst also allowing for the grandparent to specify at what age the money is made available and to control how it is used, such as education."3


  1. Barclays nor its employees renders tax or legal advice and readers should consult with their accountant, tax adviser or lawyer regarding their personal circumstances.
  2. Diversification does not protect against loss.
  3. Barclays nor its employees renders tax or legal advice and readers should consult with their accountant, tax adviser or lawyer regarding their personal circumstances.