Some years ago, many in the pensions world advised investors not to touch their pension until it was absolutely necessary. The main reason for leaving pensions until the last minute was that they grew tax-free and the older you were the bigger pension you could buy.

Here is the advice we gave (in conversational style to the client):

(Note: We are referring to personal pension style plans)

Some of your policies have not shown any growth in recent years; one reason being that they now no longer grow tax-free following the introduction of Gordon Brown’s stealth tax in 1997 when he removed dividend tax credits from pension funds (raising £5bn pa in the process).

The most frightening aspect, however, is that annuity rates do not always increase with older age. We must look more closely at each of your policies.

Many policies, particularly older individual policies, contain guaranteed annuity rates. This means there is a contractual obligation on the company to pay you a significantly greater pension than you could buy on the open market.

One of the reasons Equitable Life got into trouble was that it offered guaranteed annuity rates at all ages in all situations.

Not all policies work this way and your old Sun Life policy has a guaranteed annuity rate but, unusually, it applies only on your 60th birthday. It is available only on that date and so you must now look to take benefits from this arrangement.

You have another old with profits policy which we have wanted to move for several years but did not because of high penalties. Due to your employment circumstances when this policy was taken out, we have been able to provide protection for your tax-free cash which means that the whole policy is now available as a one-off cash payment. Continuing with this policy in its present form with tax-free cash protection would mean that the lump sum available would be unlikely to increase because of the investment fund used.

At your 60th birthday we have the ability to transfer the policy to another arrangement, retaining the tax-free cash protection and achieving a better return.

However, if you feel, like many commentators, that it is going to be several years before there is any meaningful return on investment funds and you have use for a cash payment now, I suggest you consider taking all this cash and putting it in your pocket.

Interestingly, while your Sun Life policy provides the ability for you to take some of the money as tax-free cash payment, you might want to consider taking all the cash from the second policy and no cash from the Sun Life policy, so that you can take advantage of the guaranteed annuity rates.

Another interesting twist with one of your contracts is that should you die, unlike all new pension policies where the full fund value would be paid out on death, your policy provides only for a return of contributions paid.

Being an old with profits contract, you have access to the full fund on your birthday. I am happy that it should stay within the pension environment but you should transfer it to another arrangement where you have greater control over the investments but more particularly, should you die, the full fund value would be payable to your nominated beneficiaries.

As you can see, there are many circumstances why you should always review pension policies as they approach their stated normal retirement date. In fact, we would go one step further and suggest that all investors should review their pension contracts as soon as possible as it’s crucial to ensure the money is invested in line with your risk profile and risk tolerance levels (i.e. what percentage fall in value you will accept during tough stock market conditions).

The Financial Tips Bottom Line

No one knows what will happen to annuity rates. Over the last 15 years, we have seen the amount of pension that can be purchased fall from around 15% to 6%. The economic climate is very worrying. There is a belief that interest rates will have to fall and if they do, you can expect annuity rates to worsen.

ACTION POINT

The old adage of leaving your pension until the last possible moment is no longer the case. You must now continually monitor the situation as there is no promise that by delaying taking your pensions, you would achieve a greater income.

Make sure you contact your adviser (or find one if you don’t have one) and ask them to do an audit of your pension(s), as well as recommend solutions available.

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Did you know the IRS allows you to direct how your IRS funds are invested? And in fact, you can direct your IRA monies to purchase investment real estate. With the help of Uncle Sam, your IRA funds can work for you under your direction and bring great tax-deferred financial returns.

Designating the right IRA account

Most IRAs are set up through a custodian or financial firm who manages the assets through stocks, bonds, and primarily mutual funds. With a little research, you can find a custodian who allows you to transfer all or part of your IRA funds into a traditional IRA, a Roth IRA, or a Simplified Employee Pension Fund (SEP-IRA), which allows you to direct the custodian in the real estate investments you wish to make. These types of IRAs are called “Real Estate IRAs” or “Self-Directed IRAs.” You would be wise to select an IRA custodian who is knowledgeable in the real estate investments you wish to make.

If you are knowledgeable and educated about real estate investments, or know someone who is and you want to invest with them, then this type of IRA may be for you. Once you have funds set up in a self directed IRA, you may then direct the custodian how the assets are to be invested. The IRS allows IRA funds to purchase raw land, residential houses, commercial property, or even mortgage notes or Real Estate Investment Trusts (REIT). Remember, you must research and direct how the funds will be invested. The custodian does not conduct the research nor make recommendations for you.

Profitable example of IRA-funded real estate investments

Here’s an example of how a self-directed IRA could work for you. Say you transfer $100,000 into a real estate IRA. You find a distressed single family home and pay $75,000 to purchase the home, knowing the full market value after repairs will be around $125,000. You may spend an additional $20,000 for renovation and repair costs, which come directly from your real estate IRA account. You manage to sell the home for $120,000 and put the $25,000 profit back into your real estate IRA fund, leaving your profits tax-deferred.

Downsides to purchasing real estate investment property with IRA funds

Unfortunately, the IRS has strict rules that govern your ability to make use of any property purchased with IRA funds. You may not use a residential property for your own private dwelling or vacation home. Nor can you use a commercial building space as an office for your business. However, once you reach the age of distribution, usually 59-1/2 years old, you may then use IRA real estate as a primary or secondary home.

All real estate assets must be held in the IRA custodian’s name. The purchase of residential or commercial real estate property also allows no tax deduction benefit from mortgage interest or property taxes. Depreciation is also not allowed as an expense.

When purchasing investment real estate, you must also have extra funds set aside for the payment of property taxes and other maintenance costs.

Real estate may be the best way for you to grow your retirement funds. If you know how to successfully manage real estate property, you can make it interesting and profitable by using your IRA.

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But the fact remains fact. Retirement just like old age is an inevitable thing. So, we must work upon to make things easier post retirement. You will ask – why a retirement plan so early? To find the answer, let us look at the big picture:

Retirement means – you won’t be picking up your lunch box anymore, it would mean going and getting the milk, taking your grandchildren to school and lying idly in the sun reading the daily paper. It might also mean, the milkman not coming to your home, unpaid electricity bills, compromising on things while shopping and so on…. The choice is simply yours – which one to lead. A comfortable life watching your grandchildren grow up or to live a compromised one. For certain, you will choose the first option as most of us.

With life expectancy growing up and the prices soaring up, it is crucial that we invest in a life insurance retirement plan as early as possible. The lesser the age, the more we will be able to invest and lesser premiums we will have to pay. A peace of mind, accrued with small amounts of money invested, bears it fruits in our old age.

Life Insurance plans generally work upon the idea of giving fixed returns. For this you can choose from the traditional retirement plans wherein you get fixed sum assured with some benefits or the non – conventional ones wherein your money is circulated in the market, giving your better benefits in terms of money. Either way, the benefit is the same – a peaceful and secured post retirement life.
So, what are you waiting for, get a retirement insurance plan today…