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.
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 here and put your email in, and we’ll keep you posted.