Why it’s time to look to the market for retirement savings

Thomas Moore, Manager, Aberdeen Equity Income Trust

At first sight, Chancellor Rachel Reeves’ 2025 Budget did not appear to do long-term savers many favours. But could her announcements nudge people in the right direction?

As well as reducing the amount that people aged under 65 can save into a cash ISA each year from April 2027, from the full £20,000 allowance to just £12,000, the Budget also included plans to increase tax by 2% on both investment dividends and savings interest (from April 2026 and 2027 respectively).

The income tax rises are a clarion call for savers to make the best possible use of their annual ISA allowance as a priority. But the slashing of the cash ISA limit means that if they are to maximise the amount of savings they shelter from tax, they will need to turn to a stocks and shares ISA account for at least part of it.

The volatility of stocks and shares ISAs may have been a reason why some savers have historically favoured the certainty of cash ISAs. However, at the same time as the allowance is slashed and the tax of cash interest is hiked, interest rates on cash ISAs are falling. With economists anticipating more base rate cuts, it is set to become harder to find savings accounts paying more than 4%.

This further increases the incentive to venture into the stock market, assuming you have time on your side and can tie some money up for at least three years and preferably longer. And once you’ve decided to seek exposure to stocks and shares, there is a strong argument for UK equity income as a great area to explore.

Having peaked at just under 7000 in 1999, the FTSE 100 index of the UK’s largest companies did not breach the 8000 ceiling until May 2024; it is now sitting just below the 10000 mark, having risen just under 20% during 2025. Such a strong rally indicates a change of sentiment as investors have started to return to a market unloved for over two decades.

Despite this rally, the UK equity market is still cheap in comparison with other equity markets around the world, trading at a Price/Earnings ratio of 13x compared the US equity market at 21x, Japan at 17x and Europe at 15x.

Although the UK’s headlines have been dominated by domestic economic weakness and political uncertainty, the corporate landscape by and large remains in good shape, with many companies growing profits and using those profits to pay down debt, invest in their operations, buy back their own shares, and pay attractive dividends.

With this backdrop, there is no shortage of well-managed businesses with strong earnings prospects for stock-picking managers such as the team at Aberdeen Equity Income Trust (AEI). Against a challenging economic backdrop, we see merit in a highly selective ‘best ideas’ approach, seeking out companies that are well placed to generate cash flows and use those cash flows to pay dividends.

The beauty of equity income investing is that shareholders potentially receive a dividend income as part of their investment returns. In the case of AEI that’s an attractive 6% p.a. at present – well above the best of the cash ISA payouts. While dividends are not guaranteed, they can be less volatile than shares and can help shareholders visualise the make-up of their returns.

The Trust’s status as a “Dividend Hero” helps underline the consistency of its dividend track record. The Dividend Hero accolade is awarded by the Association of Investment Companies to trusts that have maintained or grown their dividend payouts for more than 20 consecutive years and has become a coveted badge of honour among income-focused investment trusts.

With 25 years of dividend growth under AEI’s belt, the team will do all they can to protect that hard-won record. While there is no guarantee that this dividend growth will be maintained, the fact that the Trust was able to use its reserves to keep growing the dividend during the Covid crisis - despite around half the companies on the stock market cancelling their dividends – acts as a useful indicator of its robustness.

AEI’s track record provides some evidence on how the team’s stock-picking strength can underpin an attractive and growing dividend and capital growth. To 31 October 2025, the Trust beat the benchmark FTSE All-share index in total return terms over one, three and five years. To date in 2025 it has gained 28%.

At a time when the attractions of cash savings are starting to dim, it could be time to consider the dividend-rich UK market. Share prices might be unpredictable, but many companies will continue to generate cash flows and pay them out in the form of dividends.

Those payouts enable investment trusts like AEI to build a portfolio that can offer a dividend yield well in excess of the rates currently available on a cash account, with the potential for capital growth over time.

Investment objective

To provide shareholders with an above average income from their equity investment while also providing real growth in capital and income.

Important information

Risk factors you should consider prior to investing in Aberdeen Equity Income Trust (“the Company”):

• The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
• Past performance is not a guide to future results.
• Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
• The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
• The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
• The Company may charge expenses to capital which may erode the capital value of the investment.
• The Company invests in smaller companies which are likely to carry a higher degree of risk than larger companies.
• Movements in exchange rates will impact on both the level of income received and the capital value of your investment.
• There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
• As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
• Specialist funds which invest in small markets or sectors of industry are likely to be more volatile than more diversified trusts.
• Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.

Discrete performance (%)

Source: Aberdeen, total returns. The percentage growth figures are calculated over periods on a mid to mid basis. NAV total returns are calculated on a cum-income basis. Past performance is not a guide to future results.

Dividend yield (fiscal years)

Other important information:

The details contained here are for information purposes only and should not be considered as an offer, investment recommendation, or solicitation to deal in any investments or funds and does not constitute investment research, investment recommendation or investment advice in any jurisdiction. Any data contained herein which is attributed to a third party ("Third Party Data") is the property of (a) third party supplier(s) (the “Owner”) and is licensed for use with Aberdeen. Third Party Data may not be copied or distributed. Third Party Data is provided “as is” and is not warranted to be accurate, complete or timely. To the extent permitted by applicable law, none of the Owner, Aberdeen, or any other third party (including any third party involved in providing and/or compiling Third Party Data) shall have any liability for Third Party Data or for any use made of Third Party Data. Neither the Owner nor any other third party sponsors, endorses or promotes the fund or product to which Third Party Data relates.

The Key Information Document for Aberdeen Equity Income Trust can be obtained here.

Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. The company is authorised and regulated by the Financial Conduct Authority in the UK.

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