Pension reforms in the Budget caused insurance company share prices to tumble. But aside from those financial stocks who will lose a sizable chunk of business now the Chancellor has scraped annuities, the new retirement system should generate upside for equities.
According to Alan Higgins, chief investment officer at Coutts the Budget announcement that compulsory purchases of annuities would be scrapped for retirees could provide a significant boost to consumer spending.
“The reforms could also be positive for dividend-paying equities, with government estimates of £11 billion being freed up each year,” he suggested.
Higgins references a Legal & General report that estimates that up to 75% of these funds, or £8.25 billion, could be taken out of the annuity market following April 2015, when the mandatory requirement ends.
This will equate to a potential 3% boost to household discretionary income, which could be spent rather than invested in annuities or other assets – an appealing prospect when so many households have been experiencing falling real wages for years.
“Some of these retirees are likely to seek a higher yield from equities, which can also offer potential for capital gains. We estimate such a shift would be £2.5 billion at most – roughly half of the daily trading volume of UK shares,” Higgins added.
Rosie Bullard, portfolio manager at James Hambro and Partners said her preferrd asset class for ISA selections was equities.
“Within the current market, an ability to choose specific stocks and sectors is key rather than buying trackers,” she said.
“Mining sector stocks are a great example, where valuations are cheap, yields are over 3.5% and where we are starting to see share prices bounce as the market realises how much has changed inside these companies and that the negative newsflow from China and the emerging markets appears priced in.”
Bullard said that investors would have to steel themselves against short term volatility in order to take advantage of long term gains, and use share price dips as buying opportunities.
“We feel it is crucial to use weakness as an opportunity to buy quality companies, taking advantage of themes such as technological advances, the rebound in secondary commercial property in the UK outside London and the benefits of interest rate rises where companies’ liabilities are discounted at higher rates,” she said.
Timing the market is easier said than done however, so for those investors who do not wish to constantly monitor the market, setting up a regular savings plan takes care of buying on the dips for you.
Darius McDermott of Chelsea Financial Services agrees.
“If you're investing for the long term it is important that you hold your nerve when the market is struggling and continue investing,” he said. “Investing £1 a day isn't really practical, particularly if you are charged for each transaction. But you can invest as little as £50 a month quite sensibly and cheaply.”
