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How to Invest for Retirement UK – Beginner’s Guide

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Shares and bonds are ideal for retirement investments because they generate dependable returns over the long term. Read our guide to getting started planning how to invest for retirement UK to produce an income stream to meet your future pension needs.

How to Invest for Retirement UK

We begin our how to invest for retirement UK guide by walking through the initial steps you will need to take to get started on your retirement investment journey.

  • Choose an investment
  • Sign up to a broker
  • Deposit funds
  • Invest for retirement

Step 1: Choose an Investment

Deciding which investments to choose, where to invest and the proportion of your funds to allocate to each asset class are important decisions when considering How to Invest for Retirement UK.

In this section we look at each asset class in turn to explain what they bring to your investment portfolio and how they fit into a retirement savings plan.

Stocks

buyshares aggressive portfolio

Historically, stocks produce strong returns over the long term, and the longer you stay invested the greater your returns will be.

By way of example, historical returns on the UK’s FTSE 100 index of the top 100 shares by market capitalisation (number of shares issued multiplied by share price) is 4.9% on an annualised basis and 10% for the US S&P 500 index.

In addition to the capital return accrued from the price of shares rising, there is also the income to consider.

Many shares (but not all) pay an income in the form of a dividend and this is another factor to take into account when choosing which shares to buy for a retirement portfolio. The income stream from the dividend payments, if not reinvested, can be used to fund living expenses during retirement without the need to touch the principal amount invested.

For all the above reasons, shares, especially in bigger companies (larger capitalisation), are seen as companies to hold for a retirement portfolio.

Bonds

Bonds can be a relatively safe bet for investors but ultimately depends who you are lending to and the solvency of the borrower.

Bonds are debt instruments issued by a borrower, be it a government or a company. The bond is repaid after a set period and in return the lender of the funds (purchaser of the bond) receives an interest payment for the duration of the loan.

However, bonds, like all financial instruments, have a price. The price is the amount paid by the lender for the bond and moves in an inverse direction to the interest rate or yield. Price and yield have an inverse relationship – when one goes up, the other goes down.

Lending to a government such as the UK or the US is among the safest of investments because it is unlikely that the government is not going to pay back off its debt.

Also, investment-grade corporate bonds, while not as safe as lending to the UK government, is pretty close. Blue-chip companies with long histories of issuing bonds and generating steady profits are seen as safe havens by investors, and as such make for long-term investment for those looking to build-up a pension portfolio.

The yields from bonds can provide a safe and consistent income stream for retirees, plus there’s the capital return from the bond when their prices rise.

vanguard short-term inflation-protected securities ETF

The Vanguard Short-Term Inflation-Protected Securities ETF (VTIP) guards against the prospect of inflation eating into your retirement investment returns.

ETFs and index funds

Now that we have looked at the main asset classes you might want to consider for your retirement portfolio, we need to think about how to make those investments, which is where the various  types of financial instruments come in.

Exchange traded funds (ETFs) and index funds track the performance of an underlying asset or collection of different assets.

ETFs are cheap, with fees typically averaging around 0.25%. They trade on stock exchanges exactly in the same way as an individual stock does, which means they are simple to trade too.

Such is their flexibility, there are thousands of ETFs covering all areas of the financial universe, from niche areas such as nanotechnology to value stocks and assets classes beyond equities, such as bonds, commodities and real estate.

Index funds are mutual fund trackers and can include index funds under that heading. They track the constituents of a specific index and can be structured as ETFs or as mutual funds (more on mutual funds below).

Mutual funds and investment trusts

Mutual funds are collective investment vehicles that sell units to investors and can grow in size as demand requires by issuing more units new investors. Because of this structure mutual funds are known as open-ended investment products.

Unlike ETFs, you don’t buy shares in the fund but units. When you liquidate your holding in the fund the units are destroyed as opposed to with shares in stocks or an ETF or REIT, where the shares are bought by another party. They also differ from ETFs in that they are only priced once a day, usually at the end of the day.

Mutual funds come in passive and active forms. One popular form is the actively managed fund, although an increasing number of passive trackers have been launched, driven by competition with ETFs which have been taking investment flow from the mutual fund sector.

Actively managed mutual funds are well-suited for retirement investment purposes. Income class of mutual funds are particular useful here, as these are the versions of the fund that will distribute this amount to the investor, leaving to you to decide whether to use it for consumption purposes or to reinvest it.

Investment trusts are closed-ended investment companies and are used for retirement planning because of their unique flexibility.

They are allowed to borrow (gearing), which means they can use this to enhance returns and smooth out the volatility of returns, have lower fees than mutual funds and have independent boards to watch over the management team on behalf of the trust’s shareholders. Investment trusts trade on the stock market like stocks and can be priced at either a premium (worth more than their net asset value) or a ta discount (worth less than their net asset value).

Scottish Mortgage Trust

A popular stock for pensions– and the largest in the UK – is the Scottish Mortgage Trust (SMT) run by Edinburgh-based investment management firm Baillie Gifford. The trust is one of the largest institutional investors in Tesla, which it invested in at an early stage.

Scottish Mortgage Trust recently invested $100 million (£72 million) in crypto wallet company Blockchain.com. Investment trusts are a way for retail investors to get access to companies that are yet to list their shares on public exchanges and are at an early stage with their growth potential – and large profits – still to come.

Scottish Mortgage Trust on fineco

Invest for retirement in the Scottish Mortgage Trust on the Fineco Bank platform

Property

Property, often referred to as real estate, is another relatively safe asset class for pension investors to consider. However, it is the diversifying properties of the asset class when set alongside equities and bonds, that makes it suitable for pension investors and the income stream generated from rents.

As an asset class real estate tends to behave differently to shares and bonds under the same economic and market conditions. Because of this, property assets can act as a diversifier in a retirement portfolio.

If/when the stock market declines for a protected period (a bear market), property is likely to hold its value by comparison, as people will still buy and sell houses and rent commercial property. Certainly, there may be some impact on property prices and transaction activity overall during economic downturns, but nowhere near as much as on company shares.

Why REITs can be a suitable investment for retirement

In our How to Invest for Retirement UK guide we think Real Estate Investment Trusts (REITs) are well worth look as they are collective investment vehicles that pool investor resources to invest in property companies.

REITs will invest in a large number of companies from across the range of real estate types, which will include residential of various types, such as houses and student accommodation to commercial property such as retail, offices space and industrial, not to mention more niche areas such as healthcare.

buy Tritax Big Box REIT on etoro

You can buy the Tritax Big Box REIT on eToro for one of the holdings in your retirement investment portfolio

Retirement savers could also invest via a property mutual fund and there are plenty of ETFs that invest in REITS, thereby adding a further layer of diversification to your investment.

Investing directly in property

Of course there is also the direct route to property investing such as purchasing  buy-to-let properties but such investments may present liquidity problems, although if you do not intend to sell the properties and want them purely for generating a passive income, then that’s not so much of a problem.

Generally speaking, though, real estate investment trusts and other investment company and fund investment vehicles are preferred by the average retail investor of more modest means because of their liquidity – it is simple to buy and sell the shares in a REIT as compared to selling a flat to realise its equity.

Finally, the income from REITs and other forms of property investment will provide a hassle-free consistent income stream from the rental payments collected to generate a retirement income.

For all the reasons explained above, when weighing up how to invest for retirement UK, real estate should be on the list for inclusion in your portfolio.

Commodities

Commodities are another diversifier in a retirement portfolio. Commodities encompass products such as oil and gas or metals as well as industrial metals like copper and precious metals such as gold. Copper, at the time of writing, is trading near its all-time high on hopes for strong bounce back in industrial production as the world economy emerges from the Covid pandemic.

Then there are food commodities like coffee and wheat and the raw materials for clothing manufacture such as cotton.

Exposure to a cross-section of the commodities sector brings yet another element of diversity to your portfolio. The greater the variety of asset classes that you hold for your retirement savings, the greater the chance that when one asset is not doing so well, another will be.

Commodities in the energy sector such as crude oil are far more sensitive to the economic cycle and prices can bounce around in response to news flow that might affect either supply or demand.

On the other hand commodities such as coffee and cocoa, although affected by economic news and events, it is not nearly as much or as sensitively. That’s because products such as chocolate and coffee will still be consumed regardless of the economic climate, although it could be argued that buying a cup of coffee from Starbucks is very much a discretionary spending decision that can be cut. Generally speaking the leeway for cutting back on staples such as food and drinks consumption is less than for say buying a cinema ticket.

When buying a commodity-based stock or index fund, exchange rate movements is a risk factor. Many commodities are priced in dollars, because it is the world’s major reserve currency. Therefore when the dollar is strengthening in price, the price of commodities denominated in the currency will tend to become more expensive for non-dollar buyers and the price will be pressured lower. The inverse is also the case: a falling dollar price means a higher non-dollar price, all other things being equal.

Cryptocurrency

Cryptocurrencies are a new asset class. The largest asset in this class is bitcoin, which is a form of digital currency. However, it is not used much as a currency for buying and selling goods and services and tends to be used more as a store of value. But it is a volatile store of value even if it is increasingly being described as ‘digital gold’.

Its out-sized volatility makes it  risky investment, especially for a retirement portfolio. However, such a view overlooks one important point, which is if you stay invested for 3 to 5 years you will likely ride out the volatility in the price, because bitcoin has historically been registering higher lows over those timescales and reaching new all-time highs. Therefore there might be room in your pension, especially if you are some way off retirement and have the time to recoup any losses.

Institutional buyers in crypto

An increasing number of banks and other institutions are investing in bitcoin or providing services and funds to enable their customers to do so. This institutional demand has been part of the recent story behind the dramatic appreciation in the value of bitcoin.

It is thought that bitcoin is being viewed increasingly favourably as a hedge against inflation and central bank money printing and therefore may find a position in a long-term retirement portfolio as a sort of insurance policy against debasement of traditional currencies.

Many advisers will suggest investors who’s risk profile can tolerate such an investment, place no more than 5% of their investment portfolio into bitcoin or other cryptocurrency assets.

You can buy bitcoin on eToro.

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Step 2: Choose an Investment Platform

Choosing the right investment platform to fit your needs and preferences is a crucial part of the planning and decision making when determining how to invest for retirement UK. Our selection of investment platforms UK to invest in for a pension includes eToro and Fineco Bank.

1. eToro

etoro logo

eToro is a stock broker for retirement investing because of its wide choice of products. It also offers features such as Copy Trading and CopyPortfolios and 0% commission on share dealing and ETFs.

eToro is well regarded for a reason, having been in business for over 13 years and during that time amassing a loyal following of 20 million clients. The eToro platform is fully regulated in the UK and in its other jurisdictions of operation around the world. In the UK it is regulated by the Financial Conduct Authority (FCA) and your funds are protected if the platform were to fail, to the tune of £85,000 by Financial Services Compensation Scheme (FSCS).

invest in bond funds with etoro

Although you will pay an expense ratio fee when you invest with an instrument such as ETFs, which we have made wide use of in this guide on How to Invest for Retirement UK, this amount is deducted from the value of your retirement investment.

Although you may not notice this fee, it is important to keep in mind that fees are a deduction from your returns, so you want to pay the lowest fees and other charges. For this reason the 0% commission available on eToro is a key selling point and why we have picked it as a suitable broker. eToro also has a low minimum investment amount of $50 (£36), although for CopyPortfolios the minimum is $2,000.

eToro also comes with a fully featured ‘virtual’ account where you can practise making trades and familiarise yourself with the platform. We also like the fact that eToro clearly shows when you are buying the contracts for difference (CFD) version of a product and how the user interface prominently displays important information such as overnight charges when buying CFDs and stop loss levels for all types of investment.

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2. Fineco Bank

Fineco logo

Another broker when it comes to how to invest for retirement UK UK newcomer Fineco Bank. Although there is no 0% commission dealing, Fineco’s costs are low compared to other platforms that charge commission. Along with the low costs (see image below for prices) Fineco provides among the widest selection of investment products available from any broker in the UK.

In addition to shares, bonds and forex, there is a wide choice of ETFs and mutual funds available too. But Fineco takes its offerings a step further than many of its competitors with markets for futures and options. Although options are popular among retail investors in the UK, they have far less traction in the UK and could provide a way for sophisticated investors building their retirement portfolio to take more short-term hedging positions.

The platform also lists CFD products, which can be used to take short positions as well as executing traditional long (buy) orders, although CFDs may not be suited for longer-term investments because of the overnight charges. Fineco is a FCA-regulated broker and, like eToro, your funds are protected by the FSCS.

As an Italian-based bank that has recently entered the UK market, Fineco continues to expand its offerings, recently introducing an individual savings account (ISA) and also offers a debit card for its customers. ISAs are a tax-free option for pension saving. There is also a Self-Invested Personal Pension (SIPP) account available for tax-free pension investing.

fineco commissions and fees

Although there is no charge levied on buying funds, there is a platform charge of 0.25% of the value of your investments up to £250,000. To see how that works out, taking the example of a £1,000 investment with Fineco, you’d have to pay £2.50 to the broker annually. In addition to the platform charge, you will also have to pay the expense ratio charged by the mutual fund or ETF.

There are no inactivity fees, withdrawal fees, or deposit fees to pay, but, as with all investment platforms, there are foreign exchange fees. With Fineco there is no minimum deposit amount and it has security safeguards in place, as you would expect given its banking heritage.

fineco bank homepage

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Step 3: How to Make Money from Investing for Retirement

Capital gains

A capital gain is made when the value of a financial asset rises above the price an investor paid for it and that amount has been realise through liquidation of the asset. The capital gain is the profit made from the investment.

Investors buy shares in the hope of either making a capital gain or or earning an income, as we will see in the next section.

Capital gains remain a paper gains until sold. When a stock is sold for a gain, the investor can reinvest the profit in another stock they fancy or another asset class. Bear in mind that if your gain is above £12,300 in any tax year then there is tax to pay (your tax liability) at your marginal  income tax rate for basic-rate income taxpayers.

However, if you leave your funds invested in the shares, you can hopefully watch the gains build over time. There is no tax to pay until you come to sell your shares.

Note: There are tax wrappers available to minimise the tax paid on retirement savings, such as self investment personal pensions and pensions for employees such as NEST and various personal pension plans. Paying into a pension also attracts a tax relief as well as the benefit, if it is a workplace pension, of the employer making a contribution alongside your own.

Dividend

Dividends are the payments made by companies to shareholders out of profits. They tend to be paid on a quarterly or half-yearly basis direct to the shareholder and will be collected by the broker as part of the service.

Our How to Invest for Retirement UK guide places particular emphasis on dividend stocks. When selecting companies to invest in, income investors should take into account dividend yield – the amount paid out by the company in dividends compared to its share price.

Having said that, there may be some companies we want to buy that have no dividend payments but are growth companies we expect to provide a capital return.

However, when investing for retirement securing an income stream is a major consideration. Therefore the amount of dividend payments should be taken into account when deciding on which stocks to select for inclusion in a long-term investment portfolio for a pension source.

Compounding

Reinvesting dividends can see returns grow geometrically. This is because of the ‘magic of compound interest‘ and applies across the investment universe to returns on all asset classes that generate an income.

Think of the compounding effect as receiving interest on interest.

How compounding works

Let’s look at an example to compare the difference between putting your money for retirement to work on the stock market and putting it into a cash savings account.

The return on the UK’s FTSE 100 stock market index averages 7% over the past five years, with dividends (earnings from your shares) reinvested. This is referred to as the total return as it includes both capital and income.

Let’s say you invest £100 a month for 10 years in the FTSE 100. With the compounding effect, by the end of the 10th year you will have £17,610, of which £5,510 will be from the compounding of your returns.

But if you had put your money into cash savings, where rates are around 1.3%, your money would have earned £5,000 less.

You would have just £12,935 compared to £17,610 with a stock market investment. Reinvesting your dividends is a powerful way of boosting how to invest for retirement UK.

Investing for Retirement Example: How to Invest £100K for Retirement

When it comes to investing a large lump sum like £100k it is a idea to try to observe the 60:40 rule.

The rule for portfolio asset allocation dictates that 60% should be invested in stocks and 40% in bonds. We will adjust how we divide our money between investments slightly to include some exposure to commodities.

Determine your risk profile

The makeup of each asset bucket will depend on how old you are and other factors that might influence the level of risk you are willing to take. Your age will be a big determinant of your investment horizon. If you are young then you will have much longer to invest and can therefore take more risks because you will have the time for investments to recover.

The nearer you are to retirement age the less risk you will want to take with your funds because you need to preserve your capital in order for it to able to generate the income you require in retirement. If the stock market crashes the year before you retire, your investments may not have the time to fully recover from the setback.

In this example for investing £100k we will assume that the pension saver in 30s to 40s and therefore has a moderate risk profile.

  • For the stocks bucket we select five funds: four ETFS and one investment trust.
  • For the bonds bucket we select two bonds: one corporate bonds and one government bond.
  • For property we select a UK REIT ETF.

We will invest an equal amount in each holding – so £12,500 in each of the eight holdings listed in the table below.

Stocks

Bonds

Real Estate

Scottish Mortgage Trust SMT iShares $ Corporate Bond ETF LQDA iShares UK Property UCITS  ETF IUKP
Fidelity High Yield Factor ETF FDHY Vanguard Total Market Bond ETF BND
Vanguard Value ETF VTV
Vanguard Growth ETF VUG
iShares FTSE 100 UCITS ETF ISF

All the instruments in the table above are available on on either eToro or Fineco Bank

Conclusion

In this guide, we have set out how to invest for retirement UK by discussing the various factors you need to consider in order to make an informed investment decision when amassing funds for a pension.

One approach is to invest in a blend of asset classes that is cognisant of capital preservation but with scope for some capital growth and that generates a secure and dependable income from both shares and bonds. The earlier an individual starts investing for a pension, the more they can make use of the powerful effects of compounding the income generated from dividends and bond yields.

When retirement arrives the income generating portion of the portfolio can be used to fund retirement needs, while limiting the need to drawdown excessive amounts of the invested capital.

If you’ve decided to start investing for your retirement, eToro provides a cheap way to do so with its 0% commission on share dealing and ETFs. In particular, you can take a look at its growing range of CopyPortfolios as a passive investment for your portfolio. Also, ETFs are an excellent way to diversify your retirement portfolio.

Finally, consider a portfolio constructed from a mixture of stocks, bonds and property when deciding how to invest for retirement UK. eToro offers a cost-effective way to invest for your retirement.

FAQs

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Gary McFarlane author check sign Pro Investor

Gary was the production editor for 15 years at highly regarded UK investment magazine Money Observer. He covered subjects as diverse as social trading and fixed income exchange traded funds. Gary initiated coverage of bitcoin and cryptocurrencies at Money Observer and for three years to July 2020 was the cryptocurrency analyst at the UK’s No. 2 investment platform Interactive Investor. In that role he provided expert commentary to a diverse number of newspapers, and other media outlets, including the Daily Telegraph, Evening Standard and the Sun. Gary has also written widely on cryptocurrencies for various industry publications, such as Coin Desk and The FinTech Times, City AM, Ethereum World News, and InsideBitcoins. Gary is the winner of Cryptocurrency Writer of the Year in the 2018 ADVFN International Awards.

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