Instant reaction to measures announced in this afternoon’s Budget from our head of pensions and savings.
Instant reaction to measures announced in this afternoon’s Budget from Becky O’Connor, Head of Pensions and Savings (pictured), at interactive investor.
The impact of inflation at 4% for pensioners and workers saving for retirement: “The chancellor’s inflation forecast of 4% will spook everyone already worried about rising living costs.
“It will be especially scary for pensioners trying to cover essentials from their limited income and anyone trying to make their pension pot last in retirement.
“Price rises also negatively affect workers investing for retirement and trying to achieve returns that beat inflation to ensure they eventually have enough in their pension pot.
“Inflation at a level of 4% becomes hard to beat even when investing in the stock market, so long-term investors will have to box clever to beat it. Some may feel they are being pushed out of their risk comfort zone in order to do so.
“The additional prospect of an imminent rise in interest rates, hinted at by the chancellor as he referenced the Bank of England’s duty to control inflation, will be scant comfort, as savings rates remain so far behind inflation that any rise would make little difference to the appeal of keeping money in cash savings.
“Best-buy easy access accounts currently pay around 0.65%. It would take 14 quarter point base rate rises for this to beat 4% inflation.”
Pension fees cap removal:
“The chancellor is after our life savings to fund UK infrastructure. Rather than simply increasing taxes to pay for it, the government is considering changes to the pension charge cap: an indirect and possibly unnecessary measure.
“The move is being justified by the Treasury as a way to ‘unlock institutional investment’, enabling pension fund managers to divert the life savings of millions of people to ‘innovative’ development, on the basis that this requires more expensive investment strategies than is possible under the current charge cap of 0.75%.
“However, typical workplace pension scheme fees are much lower than the cap, at around 0.4% to 0.5%, begging the question of whether the cap really needs to be relaxed to fund these goals.
“The potential upside to pension savers is that the type of investments the government wants pension fund managers to make could produce higher returns for individuals than they would otherwise receive – which would be very welcome and good news for those struggling to boost their retirement pots through contributions alone.
“But there is always the risk that these higher returns won’t materialise – and then people end up paying more for their pensions for no good reason.
“All eyes will be on whether the returns to individuals justify the removal of the cap, as well as whether the resulting infrastructure boost is done in a cost-effective way, rather than lining the pockets of middlemen. Pension savers will want visibility over what is happening under the bonnet if charges do rise. Otherwise this could look like playing fast and loose with other people’s retirement money.”
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