Thinking about and planning for retirement cannot be easy in today’s environment. Annual pension allowances are shrinking, dividends and buy-to-let (both traditional sources of income for retirees) are facing increased tax burdens and HMRC interest, and bond yields are at historic lows (as are annuity rates). On the other side, longevity is increasing, and with it the risk of outliving one’s savings.
In this environment, there is arguably a natural tilt towards yield and curiosity towards alternative investments, which can provide uncorrelated returns, portfolio diversification and that wonderful realisation that investing can actually be fun as well as financially rewarding.
So, instead of thinking pension alternatives, you may wish to think alternative pensions.
You could argue that a pension and early-stage investing have much in common – the essential need to take good advice early on, to start getting involved as soon as possible and to be patient. Let’s have a look at all three.
Advice and research
How do you set up your pension? Do you choose cheap passive funds or look to shoot the lights out with the latest star manager? Do you add esoteric asset classes or stick with a tried and tested 60:40? The choices are myriad and complicated by various tax treatments and product-specific limitations.
Investing with professionals, whether through a blind-pool fund (of which there are several excellent ones in the market) or with professionals and angels through a site like SyndicateRoom, should probably be your default starting position.
The same thing applies to investing in smaller companies – how do you find and pick the right opportunity? How do you make sure that you aren’t investing in a dog or, worse, a scam? How do you make sure that you structure your share-purchase agreement in the correct way, and collect all the tax breaks available to you in the appropriate way?
Institutional investors, and some of the larger private ones, have teams of lawyers and analysts doing serious due diligence and making sure the deal is in order. You, as a private investor, can have a go yourself (tricky!), invest in a professionally managed fund (good diversification but can have high charges) or co-invest with professionals on a deal-by-deal basis. Whichever path you take, make sure you speak to a properly qualified adviser and a good accountant (they may even want to invest with you – normally a good sign!).
Plenty of articles have been written about getting started early with your pension and letting compounding do the rest. What about alternatives? Getting involved at an early stage as an investor means you get well ahead of the big money (pension funds, asset managers, etc) – often, they are restricted from investing in startups due to their investment policy or simply because they have too much money to deploy and a measly £1m deal doesn’t move their needle.
This is your edge: you can invest in promising young businesses before they come on the radar of VCs, by which point the valuation should be markedly different. Starting early and giving yourself a long time-horizon allows you to let these businesses realise their potential while preparing yourself mentally for the fact that this will take some time. Which leads us nicely on to…
One of the UK’s best and most well-known fund managers, Neil Woodford recently launched an investment trust called ‘Patient Capital’, where he will look to invest in small UK businesses in high-potential sectors (pharma, technology, etc) and hold these investments for the long term. You should look at alternative investing in the same way. Get involved early on in good companies with a lot of potential and let them grow. Do your research. Diversify. This will take time, and you can accumulate a holding in a number of companies over that time. Some will not make it, but some should – and those that do could handsomely reward you for time spent and risk borne.
So, are these illiquid, complicated and risky investments of interest? Well, when used in the right way and as a reasonable part of your well-balanced and diversified investment portfolio, they can provide an excellent source of alternative return and even have the potential to outperform in the long term. And they may get you excited about investing in a sector where you may have an interest or some knowledge – after all, early-stage investing is supposed to be exciting!
Investing with professionals, whether through a blind-pool fund, or with professionals and angels through a site like SyndicateRoom, should probably be your default starting position. It allows you to get comfortable with the asset class, and to make sure that your deals have been vetted and all the paperwork done correctly. That should provide both some comfort and a good foundation to go from, and maybe one day you will be angel investing yourself!
Risk warning: tax relief depends on an individual’s circumstances and may change in the future. In addition, the availability of tax relief depends on the invested-in company maintaining its qualifying status.