What do you do if you are rich and in need of a pension fund? It isn’t an easy question to answer these days.
There isn’t much point in piling it into an official pension pot. You already lose much of your tax relief as your income hits £130,000 and it is common knowledge that the Lib Dems have it in for higher rate tax relief: after the emergency budget, 40% and 50% tax payers may find that their self-invested personal pensions (Sipps) rather lose their allure.
But investing outside a Sipp is fraught with irritation, too – it will be another 18 days before we find out how high capital gains tax is going, but we can at least be sure that it is going up. So anyone investing in, say, equities or buy-to-let for their retirement is likely to find themselves with a nasty bill as they cash in. So where should your money go?
Private investor Angus MacDonald thinks he has the answer: buy a forest. Why? It is partly about tax. If, when your retirement arrives, you are so rich you don’t need to cash in on your trees, you can hand them on to your heirs tax-free (even if you have only had them for two years). Trees also qualify for capital gains tax rollover (you can avoid CGT by reinvesting gains into forestry); and any income you get from commercial woodland (selling timber for example) is also free of income tax. That’s a nice little perk for a 50% payer.
That said, I would not, of course, ever suggest that you buy anything just for the tax perks. Not even perks as good as this. So it is lucky that there is a case to be made for investing in forestry on its own merits.
Alan Brierley of Collins Stewart, who has looked at the global rather than just the UK market, points to timber’s general lack of correlation to other asset classes and its impressive long-term total returns: the US-orientated National Council of Real Estate Investment Fiduciaries Timberland Index has fallen in only one year since 1987 – that was 2001, when it fell 5%. US fund manager Jeremy Grantham says forestry is the only low-risk, high-return asset that has risen steadily in price for 200 years.
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In the UK, the weak pound has kept prices of forestry reasonably high even as timber prices themselves have fallen (our trees look cheap to foreign buyers) but McDonald also points to a host of things that might bring in extra money for owners from now on. There is, for example, the fact that you can usually chuck up a couple of wind turbines if you have a free spot on a hill crest and there is the new craze for harvesting woodland for biomass (read wood chip pellets), as Scottish & Southern Energy intends to do on forests it has recently bought.
But I worry about the global economy. What if Chinese growth collapses, if we enter a massive double dip and demand for timber across the world collapses? That might mean negative total returns however much the value of land goes up. Not a problem, say the forestry fans. Why? No one makes you sell your timber so you just hang on to it until things improve.
You might think that was the case with everything. But trees aren’t quite the same as everything else. If you refused the market price for your gold, you’d still have the same amount to sell a year later. But trees grow at around 4% a year. So you’d have more.
That does great things for your total returns and it also makes forestry a fantastic inflation hedge. So, if you think there is a chance that the end game to the ongoing financial crisis might be hyperinflation (see my column of two weeks ago), clearly timber is the investment for you.
What’s the catch? Well, if you want to own woodland direct, you need a great deal of it to make it effective. How much? £500,000 worth, says Angus, whose pension money is happily tucked away in trees all over Scotland.
Those of us with less have to make do with funds. Of immediate interest is a fund raising from FIM, the high-net-worth investment adviser, with whom, subject to a minimum investment of just over £28,000 and a (high) fee of 6%, you can gain access to a wide portfolio of UK forestry benefiting from all the tax breaks I mention above.
The rest of us can either go with the Aim-listed Cambium Global Timberland Fund (LSE: TREE), a great favourite of Baillie Gifford fund manager Patrick Edwardson for its global range of investments, or with Phaunos Timber (LSE: PTF), an equally great favourite of Brierley’s. There’s more risk in these – they are subject to the vagaries of the stock market and you don’t get the tax breaks. But for the poorer pension saver, they probably aren’t a bad long-term bet.
• This article was first published in the Financial Times