Three long-term ideas for your pension

The Autumn Statement on Thursday 17 November could bring about some changes to pensions. Not only should we hear about the state pension increase, but tax incentives could be cut for higher earners in a bid to plug an estimated £50billion blackhole in the public finances.

Just six weeks ago, former Prime Minister Liz Truss and then Chancellor Kwasi Kwarteng, said that the state pension would rise in line with inflation. However, new Prime Minister Rishi Sunak is yet to confirm his plans and there is speculation that the increase could be less generous.

What is the triple lock and how does it work?

The state pension is supposed to increase each year in line with whichever of the three following figures is highest: inflation (as measured by consumer price index), the average increase in wages across the UK, or 2.5%. It is known as the “triple lock”, and the increase comes into effect each April.

During the pandemic, however, the triple lock was suspended due to an unusually large rise in average earnings following the end of the government’s furlough scheme.

It was hoped the triple lock would be reintroduced to help the millions of pensioners reliant on the state pension who are finding the cost-of-living crisis particularly difficult.

But by increasing the state pension by 5.4% (the latest figure for the average wage increase in the UK) rather than the 10.1% inflation figure, the Resolution Foundation think tank estimates the government could save £6.3 billion in 2023.

What other pension changes could be made?

Other rumours circulating ahead of the 17 November budget are that tax rules designed to encourage workers to save into their pension pots could be altered.

Basic rate taxpayers currently get 20% tax relief on their pension contributions, while higher-rate taxpayers can currently claim 40% and additional rate taxpayers 45%.

Apparently, ministers have discussed reducing the rate at which tax relief is applied for higher-rate or additional rate taxpayers from 40% or 45%, to as low as 20%. By doing so, the Pensions and Lifetime Savings Association estimates that the government could save a further £8-£10 billion a year.

The lifetime allowance could also be frozen. The current rules place a cap on the amount a person can save into their pension, which is currently £1,073,100.

Anything saved into your pension over this amount is taxed at a much higher rate – currently 55% for lump sum withdrawals.

What should you do with your retirement savings?

The best way to equip yourself for a comfortable retirement is to invest for your future. This means that you would not be totally reliant on the state pension during your retirement and, let’s face it, having a pension pot of more than £1million would be a nice problem to have!

While a reduction in tax relief would not be welcomed, pensions would still be attractive, because for every £1000 you invested, another £250 would still be added by the government (that 20% tax relief we mentioned earlier). Over time, this extra money would help your retirement savings to grow.

And, if you were lucky enough to amass an amount of money that might push you over the lifetime allowance, you could always channel future savings into an ISA instead.

Three long-term ideas for your pension

Here are three funds that you could consider investing in for the long term:

Capital Group New Perspective

This is the flagship global equities strategy of Capital Group. It has a track record of almost 50 years, investing in some of the world’s largest multinational firms that are able to benefit from transformational changes in the global economy – a fitting strategy for today’s environment. The fund has a unique multiple manager structure, with each of the nine named managers running their ‘sleeve’ in their own way. Their best ideas are blended together for a diversified portfolio.

The City of London Investment Trust

Launched in 1891, the City of London Investment Trust is one of the longest-running investment trusts in the UK. It invests predominantly in larger UK companies with international exposure and has increased its dividend payment every year for the past 55 years. It has been run by the same manager – Job Curtis – for the past three decades. It’s an excellent core option for investors wanting UK equity income exposure and is very good value: it charges 0.325% per annum of net assets under management.

Ninety One Global Environment

Launched in December 2019, this global equity fund is a baby compared with our other two examples. But it has a unique approach of only investing in companies that are contributing to the decarbonisation of the world economy. So not only would you be investing for a better future for yourself, but also for the planet. The portfolio has complete conviction, with just 20-40 holdings, and will have limited crossover with peers or its benchmark.

_{Photo by Jorge Lopez on Unsplash}