Top Six Reasons Why Most Investors Include Gold in Their Pension Plans

Long-term investment, in a well-diversified manner, is key to building a secure financial future. With the increased correlation of traditional investment – stocks and bonds – over the last 18 months, many investors have sought diversification into alternatives, such as gold, as a means to successfully diversify their portfolio. Click here to read our recent research on alternative investments.

Another tenet to investment is taking a long-term view to benefit from time diversification and compounding. Compounding is a powerful concept which involves the reinvestment of returns back into further investment. Investors could enhance this time horizon by making investments in their children’s name for their future benefit, and there are various ways to achieve this, including a Junior ISA and Junior SIPP. 

Diversification with Gold

1. Historical store of value

Gold has long been considered a reliable store of value and medium of exchange, with the first gold coins dating back to the ancient kingdom of Lydia. Throughout history, gold has retained its purchasing power and has acted as a hedge against inflation and economic uncertainties. Modern-day investors treasure gold as an investment owing to the precious metal’s scarcity, purity and resilience. Gold will not tarnish or rust and is virtually indestructible.

2. Low correlation to traditional assets – diversification

Including gold in an investment portfolio can help manage overall risk. Gold’s value tends to move differently to stocks and bonds, reducing the portfolio’s vulnerability to market downturns. Investment diversification – ‘not putting your eggs in one basket’ – can help counterbalance the impact of losses in other asset classes, and potentially offer better risk-adjusted portfolio returns.

3. Global economic uncertainties

Gold tends to perform well during periods of economic uncertainty or geopolitical tensions. Investors often flock to gold as a safe haven, driving up its value. As a result, holding a portion of your portfolio in gold can offer protection against global economic uncertainties, providing added stability and peace of mind.

4. Liquidity

Investment in gold products has seen an average daily trading volume of US$140 billion over the last five years, and this is a similar market size to that of US short-term government debt securities (Treasury bills and Treasury bonds of up to three years’ maturity). The depth and liquidity in the market for gold provides assurance of the ability to trade at fair market pricing, should a market dislocation occur, where orderly trading in traditional markets becomes troublesome. 

Gold for Pensions: Junior SIPPs

With the recent news, and uncertainty, surrounding potential changes to inheritance tax (IHT) rules, some investors may look for other ways to pass assets to their loved ones.

According to Rishi Sunak’s recent report covered by The Guardian, the current IHT charge is 40% for estates worth more than £325,000, and for most married couples, the surviving partner can use both tax-free allowances to pass on up to £650,000. There is also a further allowance of £175,000 per spouse towards the bequest of the main residence, should the home be passed to children or grandchildren.

At The Royal Mint, we facilitate the purchase of gold bullion bars within SIPP- and SSAS-based pensions via our Gold for Pensions offering. A Junior SIPP could provide an alternative means to create a nest egg for loved ones, whilst also providing a tax-efficient means of generational wealth transfer.

Junior SIPPs allow for a parent or guardian to make gross contributions (grossed up to a maximum contribution of £3,600 for the 2023/24 tax year) into a SIPP, held in trust, for the benefit of their child.

5. Flexible investment choices

A Junior SIPP allows a wide range of investment options, including stocks, bonds, funds and alternative assets, such as gold. This flexibility enables investors to tailor the portfolio according to risk tolerance, time horizon, financial goals and market conditions. It is often said that the longer the time horizon there is to invest, the greater the risk is able to be tolerated and therefore, the greater the potential reward.

6. Start early, benefit more

A Junior SIPP is a Self-Invested Personal Pension specifically designed for young people. Starting a Junior SIPP for a child or young family member can provide a head start in building a substantial retirement fund. The power of compounding works best when it has more time to grow, making early contributions invaluable for long-term wealth accumulation.

7. Tax efficiency

Contributions to a Junior SIPP qualify for tax relief, just like standard pensions. The income and growth within a pension are free from Income Tax and Capital Gains Tax. This tax efficiency enhances the growth potential of the investment, as contributions receive a boost from the government in the form of tax relief. Investors making contributions into a Junior SIPP will also be reducing their estate assets, thus reducing the potential of a future inheritance tax liability.

8. Encouraging financial education

Opening a Junior SIPP could serve as an excellent tool for teaching financial responsibility and investment principles to the younger generation. Involving children or young family members in the decision-making process fosters financial literacy and sets the foundation for a secure financial future. The fact that a pension is not accessible until retirement age also means there is inherent discipline in this type of investment vehicle.

Conclusion

Diversifying your investment portfolio with gold and starting a Junior SIPP could be considered as complementary strategies that offer a robust approach to long-term financial planning. Gold brings stability and risk mitigation, whilst a Junior SIPP provides a tax-efficient and flexible avenue for building wealth to retirement. Combining these elements can create a resilient and adaptive investment strategy that stands the test of time, ensuring a secure retirement and financial well-being for your loved ones.

References:

• Investors place value at risk by not consistently holding gold, says WGC (institutionalassetmanager.co.uk)
• A Junior SIPP can support a child's long-term financial security - Courtiers Wealth Management
• Rishi Sunak considering inheritance tax cut, report says | Inheritance tax | The Guardian
• Appetite for Alternative Investments Increasing (royalmint.com)

(All sources referenced on 16th October 2023)

The contents of this article, accurate at the time of publishing, are for general information purposes only, and do not constitute investment, pensions, legal, tax or any other advice. Before making any investment or financial decision, you may wish to seek advice from your financial, pensions, legal, tax and/or accounting advisors.