Taxing problems for savers
The next generation of retirees won't have the perks this generation has, says Merryn Somerset Webb. Savers must invest their cash carefully.
Oldies vote - so you have to be nice to them. Governments get that, which is why no government can bring themselves to insist that pensioner benefits be means-tested: the over-65s will get free bus passes, the 'triple lock' (whereby the state pension goes up by the higher of inflation, wage growth or 2.5% a year) and the winter fuel allowance for ever even although, as Steve Webb puts it in The Daily Telegraph, "pensioners have never had it so good".
The median income of the retired is already higher than that of the rest of the population, according to the Institute for Fiscal Studies. But the government has no such compunction when it comes to those who aren't quite pensioners yet.
Those who are already retired had no limits on pension savings. There was no lifetime allowance (LTA), no annual allowance, and it didn't matter what you earned: you could just keep chucking money into your pension and getting full tax relief at your marginal rate, knowing that at least 25% of it would come out 100% tax-free too. Happy days particularly as those retirees were saving into one of the greatest bull markets ever.
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For the next generation, it's different. They are stuck with the impossibly complicated LTA (about to fall to £1m), a £40,000 annual allowance, the new taper allowance, and the constant threat of a cut in tax relief. They are also stuck with vast national debt and a suffocating welfare state, which suggests there is more, not less, tax to come. There is no way the well-paid today can ever create the same pensions income as the well-paid of the last generation they don't have the tax breaks.
And with rates now closer to rising than falling, and most market valuations already too high, it doesn't look like they will get the bull market either. So it matters more than ever that they invest what cash they have carefully (and put it into tax-exempt wrappers).
Last week, I suggested on our website that the bottom of the commodity cycle might be near, something the closure of the Goldman Sachs Brics fund makes me feel rather more confident in (bottoms are often marked by the closure of funds launched in periods of ludicrous optimism).
This week, I met one of my new favourite fund managers Craig Yeaman, of the tiny Saracen Growth Fund. He agrees and has started buying Rio Tinto. The global miner has a strong balance sheet. It has continued to produce good profits, even as commodity prices have fallen, and raised its interim dividend by 12%. It also yields 6.1%. Buying a miner may seem nuts right now. But buying a high-yielding, well-run company on the cheap rarely turns out to be nuts in the long run.
PS: We're working on a new publication that tackles the problem of managing your money for and during retirement head-on. Click hereand put your email in, and we'll keep you posted.
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Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).
After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times
Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.
Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.
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