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The financial impact of the war in the Middle East will have confirmed many people’s view that saving and investing for a pension is a risky business. Shares worldwide have fallen by between 5 per cent and 10 per cent. In New York, Larry Fink, head of the world’s largest asset manager, BlackRock, warns that if oil prices reach $150 (£112) a barrel, there will be a global recession. And there are plenty of warnings, including one from London-based Capital Economics, which says what is happening now is the prelude to a more serious market crash in the near future.
The current ructions are down to Donald Trump’s war, but the UK is in danger of adding another disincentive to saving for a pension. That is because the Government’s Pension Schemes Bill proposes that it should have the power to direct where pension savings should be invested, in particular requiring a proportion of the funds to be invested in UK and private assets. The House of Lords, which has been considering the legislation, has recently struck down the more extreme parts of the bill, arguing that investment decisions should remain the responsibility of pension fund trustees.
We will see how the Government responds when the bill comes back to the Commons. It will probably argue that these are reserve powers only to be used in emergency circumstances, and it may step back. But for many people faced with the question – what’s the better way to save for retirement, property or pension? – This sort of thing will tip them towards property, or even not saving for a pension at all. After all, you don’t want some future government forcing you to back a pet project like HS2.
Yet most people do need to save more for their pension if they are to have a decent standard of living in their retirement. Flagstone, a savings platform, has just undertaken a survey looking at whether people were on track to retire at their planned date. It found that only 14 per cent were putting aside enough for their pension pot to be big enough to give them their target income at that date.
Of course, there are huge uncertainties. We don’t know what sort of state pension there will be in, say, 30 years, or what return there will be on investments, or the path of inflation. But we do know two things. One is that most people are not saving enough. And the other, a rather more cheerful truth, is that by starting to save early, compound interest massively multiplies the real value of the money you set aside.
So against all the headwinds, how do you persuade people to save for a pension?
Well, war destroys wealth. This one is already hitting anyone who is filling up their car at the pumps and the other price pressures will feed through in the months ahead. Inflation, currently 3 per cent, is set to reach 4 per cent by the autumn. It has pushed up the cost of government borrowing, which in turn increases the interest on fixed-rate mortgages. The markets are forecasting that the next move from the Bank of England will be for short-term rates to go up, not down.
There is no getting away from any of that. Nevertheless, share prices have actually been pretty resilient. Here in the UK, the main market, the FTSE 100 index is down some 800 points from its peak of 10,911 at the end of February, but at around 10,100, it is actually up 50 points on where it was on the first day of trading on 2 January. Maybe there is a crash round the corner, but for the moment, that surely says that investors are being rather more adult than some of the politicians.
In the very long term, equities have been shown to bring the highest returns. Every year, there is a survey from the Swiss bank (and huge asset manager), UBS, called The Global Investment Returns Yearbook, which tracks what has happened to different classes of assets since 1900. The latest one came out earlier this month. Think about it. A century and a quarter of investment history. Two world wars. The depression of the 1930s. Two bouts of serious inflation, the more serious in the 1970s and 1980s, and now again over the past five years. Stock market manias, including the dot-com bubble of 1999. And what happens to your savings if you put your money into global equities? Your real return – that is, allowing for inflation – averages 6.6 per cent a year.
That is why there are now an estimated 17,600 ISA millionaires, according to asset managers Rathbones. The number of people with pension pots worth more than £1m is much higher, though we don’t have an up-to-date tally of that. But the Office for National Statistics (ONS) estimated that back in 2018-20, there were 1,103,000 people in that category. There will be many more now.
Getting over the idea that people should save for their pension is a tough one at a time like this. It has been given a welcome push by auto-enrolment, forcing employers and employees to put funds into their pensions unless they specifically opt out.
This Government has done some damage to confidence already by including unspent pension pots in people’s estates for inheritance tax (IHT) purposes from spring next year; it may do more if the current legislation goes through. The current US President won’t have helped boost investor sentiment either. But the logic that people should take control of their own finances is as powerful as ever.
Need to know
Three further points.
First, it does seem extraordinary that it should take a Freedom of Information request for the ONS to disclose the number of people with pension pots of more than £1m, and that the information should be at least three years out of date, having been published on 31 August 2023. It does give bite to the change in IHT – the details still being negotiated – that the Government proposes to start next year, because this adds to the suggestion that there will be several million people who see their IHT liability rise sharply. So it will be really interesting to see how this plays out both politically and practically. Great news for lawyers and tax advisers if a serious number of people decide that the costs of retiring in the UK are much greater than those of moving abroad.
Second, I do find it discouraging that one government, probably not in power for very long, feels it has the authority to make such huge changes to the tax system. This is what governments do, and legally, of course, if Parliament votes something through, then it happens. Maybe this is naïve to imagine, but a just society should have checks and balances on the power of the executive. We are now seeing in the US an extreme example of weak checks and balances within a system that was supposed to limit the executive, and I expect that will be addressed in the years ahead. We will need a debate about that, too.
Actually, there is a further example of excessive executive power of UK governments with the student loan debacle. It is extraordinary that we could have devised a system that so penalises hard-working graduates, and was designed so that some people were never expected to pay back their debts. Wrong on two counts. Yet successive governments faced no checks on what turned out to be dreadful decisions.
That leads to the third point, direction of investment. The Lords have done a good, reasoned job of stripping the pension legislation of its most troubling powers, but the Commons may overrule them. At the moment, while the principle is terrible, the actual practice is sensible enough. Pension funds should be investing more in the UK and not funnelling more and more of British savings abroad. But my worry is that some future government, strapped for cash, would compel pension funds to pay for pet projects in electorally sensitive constituencies. They would, so to speak, use pensioners’ money for political ends. So all credit to the Lords for smelling a rat.
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