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Editor's letter

A couple of things to bear in mind in 2018

Markets may be roaring as 2018 gets underway, says Merryn Somerset Webb. But more sober minds won't forget these two points.

The new year is off to a roaring start. In the US, markets appear to be in the beginning of what analysts call a melt-up. The economy is close to booming: as analyst Ed Yardeni points out, GDP is rising at an annual rate of about 3% and the phrase "secular stagnation" has barely been mentioned since Donald Trump's election.

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In the UK things are far from perfect, but most people have accepted (and begun to be bored by) the Brexit process; Theresa May has started the process of replacing herself with someone electable by promoting lots of people we have never heard of to the cabinet. GDP looks like it rose 0.6% in the last quarter of last year. Manufacturing is having its best run since 1997. Productivity in the UK is finally showing some signs of picking up. And the FTSE keeps heading for new highs. All good news.

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But amid all the excitement and the money-making (I bet most MoneyWeek readers are pretty thrilled with their returns at the moment), there are a few things anyone hoping for a secure financial future might like to bear in mind. First, melt-ups usually turn into meltdowns. Second, while your finances might look fabulous (for now), the government's most definitely do not.

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The Government Actuary Department says that, thanks to the rising dependency ratio in the UK (the fall in the number of workers relative to pensioners) and the generosity of our welfare system, the state pension is entirely unaffordable.

To keep the show on the road, national insurance will have to rise by five percentage points (or some other tax by enough to raise the same amount), say the number crunchers. That's obviously politically tricky, something that should force us to think about the possible alternatives. Could all pension tax relief be abolished so that savings can be funnelled into the payment of state pensions (see my blog for more on this)? Should the state pension age be pushed back even further? Or should the state pension end up being means-tested?

These are all things that could have a material impact on your wealth in retirement. Note that on current annuity rates the lifetime income offered by the state pension is "worth" around £280,000. That's tough to replace even if you get out of a melt-up at the right time.

So you might turn to the personal finance page in this week's magazine to be sure you are minimising your tax bill (assuming you want to the support for neo-socialism in the UK suggests not everyone does); pensions to see that you are making the most of all the pension tax relief available to you while it lasts; and the Analysis pages for our contributors' investment tips on how best to invest in 2018. The aim is to get to a level of personal financial security that means you won't ever be reliant on the state pension system continuing as it is. Because it very probably won't.

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