Now is likely to be the best time for contractors to either start a contractor pension or pump money into existing ones, with each pound invested now buying a lot more shares than it would have done just a few weeks ago, says Tony Harris of Independent Financial Advisers Contractor Financials.
On the other hand, contractors close to retirement will not be happy with the current state of affairs as their pensions may be worth considerably less than they were a few weeks ago, depending on the policies they have and the decisions they’ve made about the risks of their investments.
However, according to Harris, demographically most contractors are years away from retirement, so the volatility and uncertainty of today’s financial markets could work in their favour.
“During downturns in economic cycles, contractors traditionally rein in their discretionary spending,” explains Harris, “and include pension contributions this category. This could be a big mistake.”
Get more for your money
With the value of the financial markets, and most equities, at the lowest levels seen in decades, contractors investing in the markets will get so much more for their money, and this also applies to institutional investors like the pension funds.
“With many contractors also decades away from their target retirement date, short term volatility is not an issue,” continues Harris, “as the financial markets will recover in the medium to long term, realising significant gains for contractors who invested in their pensions, and potentially directly in the markets, when their value is low.”
During downturns in economic cycles, contractors traditionally rein in their discretionary spending and include pension contributions this category. This could be a big mistake
Tony Harris, ContractorFinancials
Contractors feeling under threat
There is another very good reason for contractors to think about increasing pension contributions or taking out a private pension if they have not considered one before.
“All the money the government has used to bail out the banks will have to be recouped through higher taxation,” Harris says, “and pensions are the one non-contentious method a contractor can use to mitigate their tax bill.”
Indeed, the government has been pushing all workers to invest more in their private pensions, and contractors working through limited companies in particular can divert substantial sums into their pension funds from their pre-tax income.
Harris’ view is that contractors would do well to heed this advice: “Without a doubt, contractors are feeling under threat at the moment, suffering the threat of harassment by HMRC and the Treasury. But paying into pensions can’t really be challenged.”
Asset allocation – spreading the risk
Now, says Harris, is also the time to think about ‘asset allocation’, or where a contractor should invest their savings and pension contributions: “Our first task with any contractor starting out with their first private pension scheme is to ascertain their attitude to risk, as this will largely dictate where their savings and pension payments are invested.
“And, of course, a contractor’s attitude to risk can change over time, so we ensure we regularly review the risk profile of our existing clients with savings and a pension to make sure their money is being invested in the way they want.”
In terms of investments for pension funds, there is a hierarchy that runs from low to high risk:
- Government bonds, ‘gilts’, Treasury bills
- Corporate bonds
- Commercial property funds
- Stock, or equity, markets, in the UK and globally.
Tony Harris is MD of ContractorFinancials, recognised as the specialist independent financial adviser for Contractors.
ContractorFinancials offer jargon free and timely mortgage, pension, insurance and investment solutions tailored to the unique needs of Contractors.
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“Typically, we see investors move from the stock markets into highly rated corporate and government bonds to reduce their risk,” says Harris, “and the virtue of spreading risk is that when one market is suffering another is doing well.”
So, in the current climate, stock market funds have gone down and gilts and bonds have gone up. Spreading risk over the long term, a position that most contractors are able to adopt, can result in the healthiest return.
Published on Monday, October 27, 2008
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