On the 17th July 2024 we had the first King’s Speech of the new government and found out more about Labour’s plans for pensions.
This was because, surprisingly, there was a new Pensions Scheme Bill announced in the speech.
I’ve now gone through the briefing notes that accompany the King’s Speech and what’s been said since by Labour ministers. So, let’s look at how Labour’s plans for pensions might impact you.
What’s been said regarding Labour’s plans for pensions
Before we start, I must say that many of the measures that are to be included in the Pension Schemes Bill were raised by the previous Conservative government. You can read more on their thought process by reading Jeremy Hunt’s Mansion House Reforms.
Labour have taken these reforms on and say they will go further.
Within the King’s Speech background briefing notes, the Pensions Scheme Bill is number three on the list of new bills discussed behind just the Budget Responsibility Bill and the National Wealth Bill.
There were over 35 bills announced in the King’s Speech so should we read into this that the Pensions Scheme Bill is an important one for Labour?
The overall aim of the bill is apparently “to increase the amount available for pension savers and could help an average earner, who saves over their lifetime in a defined contribution scheme, to have over £11,000 more in their pension pots with which to secure their retirement income.”
There is already plenty to unpack from this statement and lots wrong with it.
Firstly, no government can control what returns pension savers will make. Returns will be down to two things, the amount saved into a pension and the performance of the underlying investments.
Governments don’t control where investment fund managers invest…. yet!
It’s really misleading to communicate that government meddling is going to be able to produce a larger retirement pot and specially to put a figure on it.
If you are going to mislead the public, you would have thought they would have used a higher figure than £11,000.
They have used the words “secure their retirement income.” Which means they still believe most people will be purchasing an annuity at retirement.
If we look at what an extra £11,000 pension pot secures you in terms of an inflation-linked annuity for a 65-year-old, it is only an extra £40 per month at current rates (Source iPipeline 22/07/24).
Hardly a game-changing retirement.
However, a better aim would be to educate pension savers to save more and invest in a diversified global equity portfolio.
According to the Office of National Statistics, the median gross annual earnings are £34,963.
If the average earner in the UK contributed 10% of their gross salary per year into a pension on a monthly basis. Then because they were uneducated in how stock markets worked; they invested their monthly contributions into a ‘cautious’ fund. Based on the fund sector average they would have produced a pension pot of around £160,673 over the last 30 years.
However, had the same person invested their monthly pension contributions into a global equity fund, they would have produced a pension pot of around £590,021 over the same period.
That’s a £429,348 difference. Much bigger than the piddly £11,000 the government is trying to get to.
All pension savers needed to do was save, pick the right investment strategy, benefit from the wonders of ‘pound cost averaging’ and leave it alone. No meddling from government was needed.
One of the first points of the briefing notes confirming Labour’s plans for pensions, states that the bill will consolidate individual deferred small pension pots. So, this means pensions that are no longer being paid into. Most likely a pension you have from a previous employer.
Whilst it’s generally a good thing to consolidate pension pots to make the administration easier, lower costs and be better able to manage your overall investment strategy, caution is needed here.
Many older pension schemes still have valuable benefits available to members which would be lost if the pension was transferred.
For example, some older pensions offer:
- A higher amount of tax-free cash that can be taken.
- Guaranteed annuity rates that could be higher than the open market.
- Guaranteed return rates or bonuses.
These types of benefits are not available with today’s more modern pension schemes. So how is the government going to ensure that benefits are reviewed and not lost?
Also, where is the consolidation going to take place? I assume this will be into the Nest workplace pension scheme set up by the government which has limited investment opportunities compared to a Self Invested Personal Pension (SIPP).
Next the briefing notes mention a ‘Value for Money Framework’ where they aim to force pension providers to demonstrate they are providing value for money.
This looks like it will be policed by the Financial Conduct Authority (FCA) and will focus on investment performance as well as costs.
Something similar has been in place for investment fund managers for a while and having experience in this area all I can say is that it’s a load of extra red tape. It increases compliance costs for these businesses, the industry ends up marking its own homework and there is very little benefit for end investors.
I would argue, if you look for it the market for pensions has already produced a pretty good value for money proposition.
You can administer your own personal pension for around 0.15% a year and pick a global equity fund from as little as 0.10% per year.
This is great value when considering the life changing wealth, a pension can help you build.
A further worrying statement in the briefing notes was around pension schemes having to offer a “retirement income solution”.
This sounds like further control from the government and pension providers on how retirees can take their money out of pensions.
We have recently had an attempt to do something similar with pension saving funds, known as lifestyle funds.
The aim of these funds is to help someone manage their pension journey by holding a larger share of equities during the early phase of their life and then a reduced amount as they get closer to their retirement age.
The problem with these funds is that they don’t deal with the fact you might spend 30+ years in retirement and you need above inflation investment returns to provide you with a lasting income in retirement. A ‘low risk’ pension, mainly invested in bonds is not low risk and ensures your pot is much more likely to run out.
These types of lifestyle funds fell off a cliff during the days following Liz Truss’ famous ‘mini-budget’ wrecking lots of people’s retirement.
The government and the pension industry do not have a good record when it comes to designing investment products.
Defined Benefit pension schemes were also mentioned in the briefing notes and again it was around consolidating schemes. The government say this could potentially protect those in schemes where the employer could go solvent.
Good for the unfunded poorly run schemes, not so good for the well-funded, well-run schemes that have to accommodate the others.
There has been further talk since of merging all of the Local Government Pension Schemes into one.
The big theme for Labour’s plan for pensions is to ensure greater investment into the UK economy. They want a slice of the pension market to fund infrastructure, the green agenda and investment into private companies.
They believe that greater returns can be achieved from the private market.
This has already started with the recent announcement from Legal & General around their Private Markets Access Fund.
The problem with private market investing is that it is illiquid. There is not a readily, easily accessible market to trade your shares.
Providers like Legal & General think they have built the solution through ‘Long Term Asset Funds’ however this all sounds fine until there is a shock to the system and the liquidity is tested.
The nearest things we have currently are property open-ended investment companies where many have had to suspend multiple times over a number of years because liquidity has dried up.
You can’t all of a sudden sell bits of a property if lots of investors want their money back all at once.
Part of the problem of Neil Woodford’s Equity Income fund was because he held too much in private equity and he couldn’t sell it quick enough once investors called for their money back.
On the plus side there was no mention in the King’s Speech or the briefing notes about changes to the pension Annual Allowance, Lifetime Allowance or tax relief.
A pension review taskforce has now been set up by the Chancellor so we will need to follow this closely to find out more on Labour’s plans for pensions.
The first draft is expected before Labour’s first budget in the Autumn.
What to do in terms of Labour’s plans for pensions
Although we have found out a lot more on Labour’s plans for pensions, the detail is still light. More will be revealed in the coming weeks so make sure you sign up to my monthly email (at the bottom of this article), subscribe to my YouTube channel or follow me on X to keep up to date.
What I suggest you should be doing now is carrying out a review of all your pensions with a view to potentially consolidating them into a solution that you choose before it is chosen for you.
Find a pension provider that you are happy with and one that offers a Self Invested Personal Pension (SIPP). As not only will this give you the greatest amount of investment choice, but it will also offer you the most flexible ways of withdrawing your funds when the time comes.
Before you transfer any pension remember to check for protected benefits as discussed earlier. Also, it is unlikely you will be able to transfer ‘live’ workplace pension schemes if your employer is still contributing as this would mean you lose the valuable employer contributions.
It might be worth checking if your workplace pension allows you to do a partial transfer though, so you have the best of both worlds. Moving the pension into one of your own choices whilst still maintaining enough in the workplace scheme so as to keep it open and continue receiving employer contributions.
The biggest decision you need to make with any pension you have is the underlying investment strategy you take.
For the best results over the longer term an investment into global equity will be the most prudent but look at how your pension investments fit into your overall wealth investment strategy.
Overall, it is good to be diversified across assets from a protection point of view.
As well as owning a large share in global companies, this also includes owning actual property, physical gold and potentially even a tiny amount into crypto if you have the necessary attitude to risk.
If you leave everything as it is, you might find your pension provider and investment strategy is chosen for you and this is likely to result in a higher investment allocation into UK private markets.
It feels like the government want more control over your money, so you might want to consider things you can do to take away this control and ensure you are in charge.
If you would like to stress test your retirement plans or even to get a plan in place then please get in touch for a free no obligation 15-minute call. We would be happy to review your position, explain where you stand and what you need to do to get the outcome you desire. We have created hundreds of happy and protected retirements over the years. This could be you too.
Risk warning:
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.
