Investment trusts hold many advantages for the investor planning for retirement. Sherry-Ann Sweeting goes through what they have to offer
Taking a long term view is important for those planning for their retirement. When building a balanced portfolio advisers and their clients need to bear in mind that they are planning for a stage in life that could last 20 to 30 years. From the many savings and investment options available, investment trusts may be worth consideration for those wishing to benefit from the potential long-term growth of the stock market.
An investment trust is a company listed on a stock exchange which invests in the shares of other companies.
Investment trusts pool investors' money and employ professional fund managers to invest in a range of companies across different countries and industrial sectors that would be difficult, expensive and time-consuming for the average individual investor to access.
Using investment trusts can be a simple and cost-effective way of buying shares. Investing in an investment trust means you become a shareholder in that trust, with the potential to benefit in two ways - from capital growth if the share price rises and to receive income in the form of dividends paid. The power of dividend reinvestment in accumulating wealth through the stock market cannot be overstated; it is a crucial element.
It should be noted, however, that investment trust share prices depend on market supply and demand, and as a result, tend to differ from the underlying asset value of the trust company. This discount or premium to net assets can vary considerably over time giving volatility to the share price. Many trusts now actively seek to limit this volatility by various means. If you are unsure whether this type of investment is suitable for you, you should obtain independent financial advice.
The extensive range of investment trusts available provides enormous choice and flexibility. The varying levels of risk and potential reward mean there is likely to be an investment trust to suit most investor requirements from low risk to high - although any equity investment carries risk of capital loss and 'low risk' does not mean 'no risk'. Some investment trusts are more specialised, investing in one country - such as the UK or USA, or in specific market sectors - such as technology or commodities. Others invest globally across all countries and market sectors. These global growth investment trusts, with their world-wide spread of investment risk and opportunity and low management charges (total expense ratios (TERs) generally less than 1%), could provide the ideal core of any retirement portfolio. For investors who may have a greater need for income in retirement rather than purely capital growth there are investment trusts which invest primarily for income.
Investment trust savings schemes
Investment trust savings schemes allow investment into investment trusts without the bother and cost of going through a stockbroker. Importantly, the schemes tend to have low charges and are extremely flexible. They allow investment with lump sums or on a regular basis (usually monthly) or a combination of both. Minimum regular investment limits tend to be low - from £20 a month - and, with the exception of ISAs where limits are imposed by legislation, there are no upper limits to the amount that can be invested. The amounts invested can be easily altered, regular investments can be stopped and re-started at any time to suit an investor's circumstances and it is easy to sell the investments when required. The ability to reinvest dividends, usually free of charge, has a significant impact upon returns.
Investing for children
Investors approaching or in retirement are not always saving for themselves. Research has shown that around one third of grandparents (who may or may not be retired) put something aside in savings and investments for their grandchildren. Investing in the stock market can generate wealth over time - and if you are investing for a child, time is something you have on your side.
As well as incorporating the flexibility of investment trust savings schemes, these schemes for children tend to have very low charges. Typically they have no initial or annual charges and allow designated plans or, more formally, bare trusts to be set up at no extra cost.
ISAs - Investment trust shares can be purchased through ISA wrapper schemes. The majority of investment trust managers offer stocks and shares ISAs, some of which wrap around single trusts, others wrap around a selection of trusts. These ISAs give investors access to the benefits of investment trusts and the flexibility of investment trust schemes with the addition of tax-efficiency.
Investments in an ISA are sheltered from income tax and, importantly, you pay no tax on capital gains arising on your ISA investments.
The additional tax efficiencies of ISAs may be of particular benefit to those approaching or in retirement.
- Income from an ISA is not counted as taxable income for the purposes of the age-related personal allowance available to those over 65.
- Higher-rate tax payers do not have to pay any additional tax on the dividend income, nor does an ISA need to be included in a tax return.
- Income from an ISA is not included by HM Revenue & Customs in tax band calculations. For those on the threshold between one tax band and another, investing within an ISA could make the difference between falling into a higher rate band or not.
No matter how near, or how far, you are away from retirement two things are key - balance and diversity - both in terms of your retirement and the financial planning for it. Investment trusts give investors access to balanced and diversified funds and the long term growth potential of the stock market as part of a balanced and diversified retirement asset-mix.
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