The Week Explained: Investing in old age
As Hong Kong crawls towards providing better support for the elderly poor, we still have nothing resembling a universal pension scheme. For most people who are neither rich nor poor, providing for old age remains a headache.
This headache is hardly relieved by the assumption that seniors (generally defined as those over the age of 65) have learned nothing from their long experience of life and are assumed to be novices when it comes to investment.
Much of the literature aimed at elderly investors reflects an offensive, patronising attitude. Moreover, the elderly are often targets for unscrupulous investment schemes designed to get a share of the largish payments received on retirement.
Not all these schemes are dubious, but even the better ones need careful examination, especially when they come from financial advisers who can't bear to see retirement funds being cashed out and not replaced by other plans offering them a cut.
All too often elderly investors pour years of savings into new schemes on retirement when what they really need is not yet more delayed realisation of their financial assets but immediate income from investments plus a bit of capital gain so that their savings don't fade away.
The situation is complicated by the fact that many elderly people are relatively asset-rich but cash-poor. In Hong Kong this generally means assets consisting of property, which usually offers the utility of a home that is rising in value, but these properties yield nothing.
In places like Britain there are schemes allowing the elderly to pre-sell their homes prior to moving out, but these do not exist here. In some families the children "pay" their parents something in return for the promise of the property after they have gone. This is not ideal because doing business with close family members can be uncomfortable.
Others may decide to sell their properties and move to the mainland where prices are lower and domestic help is cheaper. The insurance company Ping An recently announced it was building a complex in Zhejiang province aimed at this market.
However, most people prefer to retire closer to their families.
The best alternative is to look for investments with the highest possible yield. The elderly are typically risk averse and generally steer into rock-solid investments such as certificates of deposit, which have zero risk. Bank insurance also secures ordinary Hong Kong dollar deposits up to a point. But investors forgo considerable income for this level of security.
And precisely because elderly investors often have time and solid experience there is no reason at all why this advantage should not be deployed in the stock market where an actively traded portfolio of blue chips and opportunistic buys of more risky stocks can be combined with the relatively safe option of investment in tracker funds.
Elderly people in receipt of pensions effectively have income, which is taxed if the provider is in Hong Kong. In most cases these pensions do not cover all living expenses yet deliver a reasonable base for recurrent expenditure, meaning that other investments do not need to be drawn down. In some instances, such as the British state pension, deferring initial payment produces higher payment down the line and this is worth considering.
Mostly, however, pension income either does not exist (and will be a big disappointment for MPF members) or constitutes a minor part of a retired person's regular income. Extra planning is essential.
However, the virtues of planning can be overstressed in Hong Kong where, unlike in most jurisdictions, moving cash into retirement funds is a way of avoiding tax. The local taxation system makes this a minor issue and allows for considerable flexibility in retirement decisions.
The main thing is to avoid getting tied up in long-term savings or investment schemes on retirement - not least because emergencies may arise where ready access to cash is essential. Secondly, be objective about which assets - including property - can be sold. Holding onto things until a fire sale is required is not a great idea.
Finally, although many people think they know, the fact is that few bother to sit down and itemise their assets to calculate their net worth. If they were to do so they might be in for a pleasant surprise.