For some clients this is the time to quickly get those last contributions into ISAs and pensions to use up this year’s allowances. But where clients have already done that, meetings at this time of year are a good opportunity to look further ahead and reflect on how the world is changing for the next tax year and beyond. Here are some areas I think make for an interesting exchange of views:
It’s time for those of us with money to give a little back
Fund managers will often choose investments because they believe they will give the biggest returns in the shortest time. And if you believe the long term is just a series of short terms butted up end to end, then maybe that is a route to long term investment success. Except that getting the greatest monetary return on our investment might not have been our real goal anyway.
In pension planning, the goal is for the money we save to provide us with a comfortable retirement, after we have given up work. And if we have given up work then we have moved on in terms of what we use money for. No longer is it facilitating bartering between working people of different skillsets – I get paid money for sorting out people’s finances, and I pay my dentist money for sorting my teeth. The money simply means that to get my teeth sorted now I don’t have to find a dentist that needs his pension fixed.
Things are a little different for retired clients. They sell assets for money to someone else that wants to buy investments, and then they can use that money to pay their dentist.
Our clients will enjoy retirement so long as the next generation of savers have money and want to buy their assets off them.
For long-term pension planning we should stop thinking about which assets might generate the biggest short term returns and instead think about which assets might lead to a future generation of workers with earnings to spare to buy our assets off us.
That is most likely to happen if we invest in growing companies, and in the infrastructure needed for the future and in the UK. In short, in the things that will lead to growth of the UK economy.
Such investments will benefit everyone, not just the individual saver. They might be giving up higher returns available from investing in US tech companies, but by giving a little back, they and others will have a better long-term future.
A pension is an income, not a savings account
The steady decline of final salary pensions and their near universal replacement by employers with money purchase pensions has led to a world where we create pots, not pensions. Pots might be easy to measure – simply multiply the number of units by the unit price and there’s your answer – but pots are not what we need.
If I think about what my own retirement needs are going to be, I’ll need a regular income to replace my wages, an income that rises with cost of living as I’m sure there will always be inflation, an income that continues for my partner if I die first and something to leave to the children and grandchildren when I go.
We must give more thought to how we turn pots into pensions.
The range of options is better than it was. Annuities are today invested in better things than gilts, take note of health impairments and offer better income than before. An excellent science has grown up around blending annuity with income drawdown. New CDC, or Collective Defined Contribution, schemes are on the way that will offer lifetime income with targeted inflation protection. We may see more product innovation yet. And of course, we’ve always had multi-generational pension schemes such as SSAS.
But many clients are still at first base, are still accumulating pension pots, and have yet to start thinking about how to turn pots into pensions.
The recent IHT announcement may be the catalyst for change for some. Leaving 40% of the unused pension pot to the Chancellor could spur people to turning more of it into income, to be enjoyed or gifted sooner rather than later.
FOMO will drive more investment in British assets
The Government’s Pension Review has revealed the scale and speed of the exodus of pension fund investment from Britain. Looking at the equity holdings of DC pots, the Pensions Review notes that in 2012, 40% of these were shares in UK companies. Today that figure has fallen to just 8% of DC equity holdings being in the UK market.
I’m feeling a little surprised that daily news bulletins on the radio even mention the ups and downs of the FTSE index anymore, as it would seem to have scant relevance to listeners’ worth.
Both the current and the previous Chancellor feel that something needs to be done, to get more of the savings of British workers invested back into British jobs. The Conservatives’ plan was for a British ISA. This was to be a new £5,000 allowance, in addition to the existing ISA allowance, to provide a new tax-free savings opportunity for people to invest in the UK, while supporting UK companies. But the idea found little favour and the Labour Government scrapped the proposal in September.
A survey from the Pensions and Lifetime Savings Association in March 2024 showed that 67% of DC savers supported additional tax incentives for investment in UK companies, with that figure increasing to 74% for those aged 55 and over. This idea also seems to have failed to gain traction.
The natural tendency for a Labour Government is closer to directing people than incentivising them for doing the “right thing”. So far, they have stayed clear of mandating specific quotas for UK investment, but the proposals for the Local Government Pension Scheme do include two elements of compulsion that take us in the direction of more UK pension money being invested in the UK.
Firstly, local authorities will be required to identify local investment opportunities for consideration by their pension fund’s investment committee. Secondly, the funds which are now grouped together into eight large asset pools, must consider these opportunities and conduct due diligence on them. I should stress that there is, as yet, no requirement for these two mandatory processes to be followed by any allocation of investment money.
In both the Conservative and Labour thinking there is an element of “something must be done”. Perhaps they have overlooked the natural tendency of markets to self-correct.
We have seen strong signs recently that foreign institutions are starting to see value in Britain. US Hedge Fund Saba Capital has taken stakes in several UK investment trusts, believing them to have hidden value that a refreshed strategy could release. And Meiji Yasuda, a Japanese mutual life insurance company has announced that it will take a 5% stake in Legal & General as well as partnering with it in the US pension risk transfer business and buying L&G’s US protection business outright.
These positive signs could be the portent of a coming re-rating of UK equities. For the current levels of dividend and earnings, UK shares may command a higher market price.
As things gather pace, we may see DC pension fund money returning quickly to the UK, driven by a fear of missing out amongst asset managers that know only too well that missing a market upside risks losing an investment mandate to others who were more prescient.
All in all, I see lots to talk about in client meetings over the coming year.
About Adrian Boulding
Adrian Boulding is the Director of Retirement Strategy at Dunstan Thomas. He provides strategic advice to the Dunstan Thomas executives on pension trends and developments and writes for a wider audience in press and social media.
