In just a few days we will witness one of the most talked about days of the year. No, I’m not talking about Easter Monday, I’m thinking about “pensions freedom day”, the much anticipated date for your diary (if you’re 55 or over) or work in the financial services industry.
There have been a number of concerns, mainly surrounding people withdrawing their life savings to spend on a premium sports car or some other luxury, and being heavily taxed as a result. Personally, I don’t think that these fears will materialise — indeed I think it will bode well for companies like GlaxoSmithkline Plc (LSE: GSK), National Grid Plc (LSE: NG.), BP Plc (LSE: BP.) and Hargreaves Lansdown Plc (LSE: HL.). Let me explain why…
What’s Changing?
Well, from Monday 6th April:
- Eligible people will have the right to gain full access to their pension
- No one will be forced to buy an annuity
- Savers will be able to cash in their pension in one go
- Savers will have the right withdraw over and above their tax free limit (currently 25% of the pot) subject to a tax charge
- Guidance will be available via a government website
In effect, savers could withdraw their entire savings pot, but the proportion that isn’t tax free will be subject to income tax. Whilst there will be stories in the newspapers from the few that may withdraw every last penny and disappear on a private jet to Vegas, I think that the majority savers are far more sensible and will not rush for the exit, to be closely pursued by the tax man.
Personally, I think we’ll see is an increase in customers using their pension pot as a source of income, also know as drawdown. This theory is supported by the fact that the number of people choosing drawdown in the last year has doubled.
Who Will Benefit?
I believe that most of the savers entering drawdown will be looking for a safe and secure income in order to maintain their lifestyle or, perhaps, to support a reduction in their working hours. Let’s face it, not many of us can afford to retire at 55 these days!
To my mind, that means that savers will seek out companies, equity or bond funds or investment trusts that pay an above average dividend yield, as they start to move their portfolios from targeting growth, to targeting income.
Whether they invest directly in the company, or seek out a fund or a trust manager to do the legwork for them, I expect investors money to start to trickle into companies like:
- GlaxoSmithkline — currently paying a quarterly dividend and yielding over 5%
- BP – dividends are paid quarterly and at current prices, the stock yields over 6%
- National Grid — perhaps one of the most defensive companies on the FTSE 100. Dividends are paid twice per year for a yield of 5%
A Piece Of The Action
With a prospective yield hovering around 3%, readers may wonder why I’ve included Hargreaves Lansdown. My thinking is simple — it’s the UK’s market leading fund supermarket, and savers often have more than one pension, usually with different providers. I can’t think of a better company, with its first class customer service, to entice savers to consolidate all of their plans into its ecosystem.
Whether savers decide to trade themselves, invest in a fund, a trust, or shop around for an annuity you can bet that this high quality company will be able to make money — whatever their customers decide to do.
