Pension Changes May Be Great News For Aviva plc, Legal & General Group Plc & Prudential plc

Prudential plc (LON: PRU), Legal & General Group Plc (LON: LGEN) and Aviva plc (LON: AV) will benefit from further UK pension reforms.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

After last year’s sweeping changes to the UK pension system, Britain’s biggest insurers are facing yet another wave of pension reforms and changes to tax relief rules. 

Life insurers and savings providers Prudential (LSE: PRU), Legal & General (LSE: LGEN) and Aviva (LSE: AV) took a hit last year when the Chancellor announced that he was scrapping compulsory annuities in what was the largest pensions overhaul for more than 90 years. And now, the Chancellor has begun consulting on whether to treat retirement pots in a similar way to individual savings accounts (ISAs). 

At present, savers receive tax relief when they pay into a pension pot but are then taxed when the money is drawn as a pension. The proposed reforms would reverse this. Contributions would be taxed as normal while pension payouts would be tax-free.

These changes would do more than just shake up the pension system. Pensions would, to a certain extent, lose their retirement savings status — the line between retirement savings and regular investments would become blurred.

Analysts believe that this change would have two effects. Firstly, competition would increase dramatically as non-traditional pension providers entered the market. And secondly, it’s expected that overall inflows into pension products would increase.

Polarise the industry

City analysts also believe that these two changes will polarise the pensions industry. Traditional pension providers will suffer while managers like Aviva, Legal & General and Prudential, which have invested heavily in fund management divisions, will benefit.

What’s more, these providers have economies of scale. Aviva, for example, is the UK’s largest pension savings and annuities provider, allowing the group to achieve profit margins above the industry average. Legal & General is the biggest manager of UK pension assets, and Prudential has built a reputation as one of the most efficient pension managers.

These traits will help Prudential, Legal & General and Aviva pull ahead of the pack if new pension rules come into force. Not only will these companies be able to offer the best package for the best price to consumers, their size and diversification will help convince potential customers that they provide the best value for money. 

Long-term plays

Even if the proposed pension changes aren’t made into law, Legal & General, Aviva and Prudential will remain great long-term investments. Managing pensions, savings and life insurance is a long-term process that takes plenty of skill to get right. Luckily, these companies have perfected the process over the past 200 years. 

Moreover, the three pension providers are all income plays. Legal & General currently supports a dividend yield of 4.9% and Aviva supports a yield of 3.9%.

Unfortunately, as Prudential’s earnings are expected to grow by 13% this year, the company trades at a premium forward P/E of 14.4 and only yields 2.5%. However, sometimes you have to pay a premium for quality. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »