Susannah Streeter, Chief Investment Strategist at Wealth Club:
“Bond markets are staying wary despite signs the Burnham administration will take bold steps to rethink government spending priorities by axing the triple lock for the State pension. There remains nervousness about the scale of the government’s ambitions, when it has so little wriggle room. 10-year gilt yields dropped back very slightly, as rumours swirled about the move to scrap the mechanism to help fund the creaking social care system, but investors are also digesting the government’s willingness to remove the ban on public ownership of water companies, which could pave the way for a raft of renationalisations. Although the Prime Minister does appear to have pulled off the trick of not unnerving markets further, he still faces an uphill battle to keep bond investors on side, especially at a time when the energy crisis risks causing inflationary pressures to pop up across the board.
Why could this make retirement planning more difficult?
The scrapping of the triple lock does raise big questions for people still building their pension pots. If future State Pension increases are no longer guaranteed to keep pace with earnings, people approaching retirement could find that the income they receive from the State makes up a smaller proportion of their previous salary. The goalposts have kept moving, with the age of drawing a pension having crept higher in recent years and set to increase again to 68 by 2046. These incremental changes don’t mean that people should suddenly assume the State Pension is going to disappear. But they do indicate that savers may need to think much more carefully about how much retirement income they need to generate themselves. As we’ve seen from this move, trying to predict exactly what governments might do over the next few decades is a difficult game to win. Building financial resilience so you have room to manoeuvre whatever happens is a much more sensible one.
For those with several years or decades still to go before retirement, it’s abundantly clear that the private pension pot may need to do more of the heavy lifting. The State Pension remains an important foundation for retirement income, but people approaching retirement may increasingly need to rely on their own savings and investments to provide the income they want and to help bridge any gap between State Pension payments and their previous standard of living. The objective should be to build a retirement pot with enough scale and diversification to provide options if the State Pension no longer keeps pace with wages.
The key question for savers is no longer simply how much they can expect from the State Pension, but how much income they will need in retirement and how much they need to build themselves to fill the gap.
Eight steps investors take now to build their pensions.
First, it’s really important to capture every pound of pension contributions available from an employer. Check the workplace pension scheme and establish the maximum contribution the employer will match. Turning down an employer contribution can effectively mean leaving part of the overall pay package on the table.
Second, avoid unnecessary contribution gaps. Opting out of a workplace pension can mean giving up employer contributions, while even relatively small increases in contributions can compound over many years. Younger and mid-career workers can be particularly vulnerable to leaving the heavy lifting of retirement planning too late. Time is one of the most powerful ingredients in pension investing because contributions made early have longer to benefit from investment growth and compounding. Steadily increasing contributions over a career can therefore be much more effective than trying to make up a shortfall in the final years before retirement.
Third, increase contributions when your salary rises, or you receive a bonus. Directing at least part of a pay increase into a pension can boost long-term savings without necessarily feeling like a reduction in existing spending power. It can be much easier to save money you haven’t yet become accustomed to spending.
Fourth, review pensions regularly. Investors shouldn’t simply pay into a pension and forget about it. Charges, investment performance, asset allocation and the suitability of the portfolio should all be reviewed as circumstances change.
Fifth, maintain a long-term investment mindset. Retirement portfolios typically have a multi-decade horizon, so investors should focus on the potential for long-term capital growth rather than becoming overly distracted by short-term market movements.
Sixth, consider diversification beyond traditional assets where appropriate. For experienced investors with sufficient assets, a long time horizon and the ability to tolerate higher levels of risk and illiquidity, private markets can potentially provide another source of diversification. Private equity, private credit, infrastructure and other private assets held through a SIPP can provide exposure to companies and assets that aren’t available through traditional listed markets. They can therefore potentially add another layer of diversification alongside listed equities and bonds.
Seventh, don’t mistake tax efficiency for diversification. Tax-efficient wrappers remain an important part of retirement planning, but a portfolio shouldn’t be built around the assumption that today’s tax treatment will remain unchanged. The underlying investments and the overall spread of risk matter too.
Finally, keep accessible savings outside the pension. Pension money is generally inaccessible until the minimum pension age, so investors should retain sufficient readily accessible savings to deal with emergencies and shorter-term needs.”
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