How will the new pension reforms impact investors?

Ian Cowie reviews the pension reforms announced in the 2023 Budget and explains how investors will benefit when saving for retirement.

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Investment companies are ideally designed to help us save sufficient funds to pay for an enjoyable retirement – and Budget 2023 made it much easier to do so. Pension reforms were by far the most important changes for investors announced by Chancellor Jeremy Hunt.

Before wrapping a cold towel around my head and getting into the details, I had better say straight away that I believe Hunt’s reforms are extremely beneficial, increasing consumer choice and engagement. It is no exaggeration to say they are of similar significance to 'pensions freedom’, announced in March 2014, which gave us greater flexibility about how we spend our life savings.

To be specific, Hunt’s abolition of the lifetime allowance – which used to punish successful investors by imposing up to 55% tax liabilities on funds worth more than £1,073,100 – will make defined contribution (DC) retirement schemes much more attractive. Similarly, increasing the annual allowance by 50% – lifting the maximum that we can put in a pension this year from £40,000 to £60,000 – will also make it easier for people to accumulate the very large capital sums now needed to produce sufficient income to enjoy retirement.

"Increasing the annual allowance by 50% – lifting the maximum that we can put in a pension this year from £40,000 to £60,000 – will also make it easier for people to accumulate the very large capital sums now needed to produce sufficient income to enjoy retirement."

Ian Cowie

ian cowie

People who have already withdrawn some money from their pensions and who might wish to return to working and saving will benefit from the so-called Money Purchase Annual Allowance (MPAA) being raised from £4,000 to £10,000. For high earners, complex restrictions on the tapered annual allowance were also eased.

Unfortunately, it remains a fact that DC schemes, including all personal pensions and self-invested personal pensions (SIPPs), inevitably transfer risk from corporate employers, with old-fashioned defined benefit (DB) pensions, to individual employees and investors. Whatever our employment status, in order to obtain sufficient rewards to fund retirement outside DB or ‘final salary’ schemes, some degree of investment risk is unavoidable.

These risks include the possibility that share prices might fall without warning. Investment companies can diminish that risk by diversification – or spreading our money over dozens of different companies, countries and currencies – reducing our exposure to setbacks or failure at any one business.

Investment companies also enable us to share the cost of professional fund management. This can give us access to specialist areas of the economy where we might know next to nothing – or economies overseas that trade while we are asleep – increasing our exposure to opportunities for capital growth and income.

For example, as a layman I know very little about medicine in general, let alone the specifics of new lymphoma drugs that can help to cure cancer. But this is an area where scientific innovation is not only improving people’s health but also creating real wealth out of thin air.

Investment companies enable everyone – with or without medical knowledge – to participate in funding pharmaceutical research and share in its rewards. To be specific, just a few weeks ago, my shares in International Biotechnology (stock market ticker: IBT), benefitted when this investment company’s biggest underlying holding, the cancer specialist Seagen (SGEN), received an agreed $43 billion (£36 billion) takeover bid from the vaccine-maker, Pfizer (PFE).

As it happens, PFE shares were also held by another investment company, Worldwide Healthcare Trust (WWH), which is one of my top ten holdings by value. It’s a small world and investment companies bring much of it within reach.

Similarly, Ecofin Global Utilities and Infrastructure (EGL) makes it easy for me to invest in solar and wind power, generating income and growth, and is also a top ten holding by value in my ‘forever fund’. Meanwhile, Polar Capital Technology (PCT) gives me exposure to areas of the digital economy that would remain ‘terra incognita’ for this arts graduate if I did not have investment companies to help me explore them.

This form of pooled fund, listed on the London Stock Exchange, also enables pension investors to draw sustainable and potentially rising income from our life savings when we retire. Investment companies can smooth out some stock market shocks, such as when dividends are cut or cancelled, by holding back up to 15% of returns in good years to sustain payouts to shareholders in bad years.

No fewer than 18 investment companies have raised their dividend payments to shareholders every year, without fail, for 20 years or more. These ‘dividend heroes’ are all the more remarkable when you consider that more than half the constituents of the FTSE 100 list of Britain’s biggest businesses cut or cancelled their dividends during the coronavirus crisis.

At present, because I am still working, capital accumulation remains my priority and I do not own shares in any dividend heroes. But I intend to do so in retirement, when a reliable and rising income will be among this pensioner’s priorities.

Here and now, whether our objectives are capital growth or rising income or a mixture of both, investment companies can help us diminish risk and maximise rewards from our lifetime savings. Hunt’s Budget 2023 makes it easier to make the most of these opportunities.

Ian Cowie is a shareholder in Ecofin Global Utilities and Infrastructure (EGL), International Biotechnology (IBT), Polar Capital Technology (PCT), Pfizer (PFE) and Worldwide Healthcare Trust (WWH) as part of a globally-diversified portfolio of investment companies and other shares.