Hunt’s promise to boost pensions by £1,000 – will you benefit?
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Chancellor Jeremy Hunt has promised to “boost” pensions by £1,000 through a series of pension reforms which mirror the Australian and Canadian systems. Yet how meaningful are these measures? Will you benefit at all?
Below, our Lincolnshire financial planners explore some of these proposals and how they might affect people in retirement. If you want to discuss your financial plan with a financial adviser, please get in touch to arrange a no-obligation financial consultation, at our expense:
01476 855 585
info@casfin.co.uk
What are Jeremy Hunt’s 2023 pension reforms?
On 10 July 2023, Chancellor Hunt used a speech at Mansion House to unveil plans to help boost pension savers’ returns. Adding together the potential benefits of the measures, he claimed that an individual could gain up to £1,000 more in annual retirement income.
One of the measures was to introduce a “compact” amongst the UK’s major pension providers. At present, these focus a big portion of their investments into large, publicly-listed companies which have already gone through their “growth” business phase.
However, by investing 5% of their assets into private equity and startups, up to £50bn could be unlocked to invest in fast-growing companies by 2030. The result could potentially be higher returns for the funds – as well as their investors (e.g. pension savers).
Another measure is to accelerate the introduction of “superfunds”. These aim to consolidate smaller pension schemes so they can benefit more from economies of scale – allowing them to take on more risks with their investments and access higher potential returns.
Will I benefit from the pension reforms?
The UK’s pension industry certainly seems to have a net positive view of the reforms. Already, Aviva, Scottish Widows, L&G, Aegon, Phoenix, Nest and M&G have come on board.
Giving more investment choices to pension providers could help them pursue opportunities which were previously unavailable to them – possibly unlocking higher returns for investors.
However, the measures may not start to be felt by investors until the end of the decade. There are also questions (even by government officials) over whether savers will be better off.
Private equity firms tend to charge higher fees (e.g. 2% or more, plus a 20% performance fee) as payment for the higher potential returns they claim to offer. Pension fees, by contrast, are currently capped at 0.75% with no performance charge allowed.
Private equity charges eat into investors’ returns and are not always justified in light of actual performance. Indeed, one former FCA official argues that the government has not factored these costs accurately into its modelling when coming up with the £1,000 “boost” figure.
The government suggests that pension providers may be able to negotiate with private equity for a 1% fee for annual management and 10% for performance. Yet analysts widely see this projection as very optimistic.
What is the best way to boost my pension?
When building a pension strategy, it is important not to blindly trust in fund managers, pension providers or governments to act in your best interests.
Rather, you should decide where you want your money to be invested in light of your financial goals, circumstances, time horizon and risk profile. Working with a trusted professional can help you navigate this process with more confidence and good information.
For instance, if you are employed, have you checked where your pension contributions are being invested with your workplace scheme? Many schemes simply enroll new members onto the “moderate” portfolio by default, yet the funds offered by this option are not always suitable.
A young person starting out in his/her career might, instead, benefit more from a more “aggressive” or “adventurous” portfolio where higher potential returns are on offer (assuming they are happy to take on greater risk).
The performance of different pension funds can vary quite widely. This means that not all workplace schemes are created equal. Some may offer more funds than others, with better performance and lower fees.
Taking control of your pension could be a far more effective way to boost it, rather than relying on promises of industry reform. One option for employees might be to rearrange funds, changing how their pension is invested. Others may benefit from switching schemes entirely.
If you have pensions from previous jobs, then one option could be to seek advice about consolidating them into one pot and picking an appropriate strategy for the underlying investments. This can give you more oversight and better decision-making power.
Be careful, however, not to give up any benefits which you may not wish to lose (e.g. guaranteed annuity rates). In some cases, it makes sense to consolidate the majority of an individual’s old workplace pensions but retain one or two which are valuable on their own.
Conclusion & invitation
Pensions and retirement are complex but vital areas to get right when it comes to planning for later life. Getting professional advice can help you make sense of things and give you the information you need to make educated decisions.
If you are interested in discussing your own financial plan or pension strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
01476 855 585
info@casfin.co.uk
