The Chancellor has announced a new initiative to stimulate higher-risk pension investment, shifting focus to UK private companies.
“British pensioners should benefit from British business success. By unlocking investment, we will boost retirement income by over £1,000 a tear for a typical earner over the course of their career.”
Those are the words of the Chancellor, quoted in a recent press release from the Treasury launching the Mansion House Reforms on pension fund investment. The statement is a bold one that would probably attract criticism from the Financial Conduct Authority about unjustified performance claims, had it not been made by the regulator’s ultimate boss. Suggesting that any particular investment action “will boost income” ignores the familiar caveat that the value of investments can fall as well as rise.
In the case of the Chancellor’s proposed reforms, that warning is particularly relevant because of the investments being targeted. For example, a key part of the package was the announcement that by 2030, nine of the UK’s largest Defined Contribution (DC) pension providers aim to place 5% of their default funds into UK private companies, that is companies whose shares are not listed on the London Stock Exchange. Such companies are generally small and often young. While they offer the potential for high growth – think start-up technology businesses – they are often also high risk and not all of them succeed.
That risk means that such businesses can find raising capital difficult and governments have often stepped in with tax incentive schemes, such as Venture Capital Trusts, to encourage investors to commit funds. The Chancellor is adopting a less tax-costly approach by encouraging workplace pension funds to allocate part of their members’ exiting contributions to unlisted companies. If other DC pension providers follow suit, the government thinks “up to £50 billion of investment in high-growth companies” could be unlocked by the end of the decade.
The allocation will only apply to default funds, which are the funds where employer and employee pension contributions are directed if no fund choice is made. Most of the 18 million active members of DC workplace pension schemes end up invested in default funds. However, if you are in such a scheme, you will almost always have a choice of other funds. For example, for some, looking at sustainability and climate-related issues may be an important factor.
The Chancellor’s latest move is another reminder that default may not be the best option and that, as with any investment, personally tailored advice should be your starting point.
The value of pensions and investments and the income they produce can fall as well as rise and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
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