It’s a well-known fact that in times of economic, political or fiscal uncertainty physical gold tends to increase in value. Countries also hold gold as a precaution to safeguard themselves against inflation, loans, debt and economic disasters – the total gold holding globally was just under 32,000 tonnes in the summer of 2014 – and individuals use gold for similar reasons.
The Financial Conduct Authority (FCA) has recently classified gold bullion as a ‘standard’ asset, putting it in the same category as cash, allowing gold to be used in a SIPP. By owning gold bars within your SIPP you are able to remove exposure from many of the threats and risks that eat away at a pension. With a SIPP you can continue to have exposure to riskier assets whilst hedging that risk with gold.
For example – let’s take the average pension pot of £72,134. Under the old pensions rules that changed in April,
you would have to take out an annuity at retirement, which works like a payment plan from the pension provider to the pensioner. This annuity would only provide a monthly income of £240/month which for most doesn’t generally allow people to rely on their pension income alone. When the market experiences a significant fall in confidence similar to October 2014 whereby people lost up to 10 per cent of their pension value – the consequence in real pension terms would have been a loss of £24 per month in annuity income.
From April 2015, instead of pensioners receiving an annuity they are able to take 100 per cent of their pension pot as cash. These new changes mean that people will have more to gain but also a lot more to lose. People have more to stake with their pension and the implications are that the general public should take far more of an active role in managing their pension.
Under the old rules the 10 per cent drop in equities during October 2014 saw people lose £24 per month. Now under the new rules people would have lost £7,213 in a day which serves a much harsher blow. The new rules invoke a bittersweet effect; on the one hand people are delighted that they can now receive 100 per cent of something they’ve been saving up for. On the other hand the old rules didn’t encourage people to protect or manage their pensions as the implications weren’t severe or motivating enough. They are now.
So, how should you use gold in a pension? It should be bought as a stabilising factor in a pension, not as a value buy where you expect to see growth. However, buying gold comes with its own pitfalls, so here are a few important points to remember.
Firstly, be wary of investing via an Exchange Traded Fund (ETF) that appears to invest in gold through, say, shares in mining companies. Long-term investing in gold ETFs (for one year or longer) is subject to Capital Gains Tax when held outside an ISA but there is no Capital Gains Tax to pay when a UK resident sells UK gold coins at a profit, as these coins are classified as legal tender, yet many other alternative investments attract Income or Capital Gains Tax. The coins can be directly held within a SIPP and so they are a very good option for conservative investors. There is up to 45 per cent income tax relief on SIPP gold investments. Ensure the gold is fully allocated rather than leveraged like ETFs and fully segregated, meaning it is fully ring-fenced from other investors’ gold.
Also remember that being able to sell an asset quickly means clients can achieve the best possible price. You should purchase small retail size gold bars for a pension to provide maximum liquidity and flexibility because it’s not possible to break one huge gold bar in half if you only wish to sell part of the holding.
Finally, silver and platinum are both worthwhile considerations alongside gold but remember that there is no VAT on investment grade gold – gold of at least 22 karat in purity and in the form of either a coin or bar. Silver and platinum both attract VAT.