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Equity investments will benefit from Budget pension changes

It always seemed odd to me that the Government appeared to trust teenagers to know how to spend a windfall they received from someone else’s generosity, more than pensioners who had saved prudently over decades with their own money.

Back in 2005, when Child Trust Funds were launched, the Government consulted on whether there should be rules on what the funds could be used for when the child turned 18.  Cue scare stories of teenagers frittering their entire pot away on wildly extravagant parties and lavish holidays rather than a deposit on a house, university fees etc. This despite research which showed that, where parents had saved patiently for their childrens’ future, these funds were, more often than not, used for something fairly dull and sensible.

Fortunately, there was a bout of common sense, and we were spared the bureaucratic nightmare of trying to control the use of CTFs.  But it seems that some would like to have the same type of debate over the Budget’s pension reforms.

Whatever else the Budget announcements were, they were certainly radical.  I think many investors will think long and hard about buying an annuity offering, say, 6% when this has no prospect for income growth, and the capital dies with you, when they could invest this in a range of investment companies yielding 4%, with the possibility of income and/or capital growth over the long-term, and the ability to hand down assets on death.

Of course, some people will argue this is not comparing like-with-like, given the greater risks from equity investment.  Which is sort of the point.  Many investors don’t like what annuities have to offer.  They want something different.

With the collapse of deposit rates since the banking crisis, we have seen many investors turn to equity-based investments to provide income.  They have reckoned that, providing they can ride out the ups and downs in the market, they get a better initial income, as well as the possibility of income and/or capital growth over the long-term.  And those that took this view when interest rates fell to 0.5% in 2009 have been well rewarded.

The point is that these investors do not think that equity income investment is a substitute for deposit accounts.  They are just looking at income investing in a different way.  Many will come to look at income provision in retirement in the same way.  And this is where investment companies come into their own, as our dividend heroes research demonstrates, due to their ability to keep back income in good times to boost or maintain dividends in leaner ones.

Yes, there are risks that come with such major reforms and good quality financial advice will be key to helping pension savers make the right decisions on retirement.  But my experience of people who have saved their entire lives is that they don’t squander it at the first opportunity they get only to fall back on state support.

They need to be protected from the unscrupulous, not from themselves.

 

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