Long-term pension investors’ hidden advantage

The biggest source of household wealth? Private pensions.

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.

A few weeks ago, the Office for National Statistics unveiled its latest household wealth survey, Household total wealth in Great Britain: April 2018 to March 2020.
You probably saw some of the media coverage, a lot of which was rather predictable.
The Guardian, for instance, unsurprisingly led with the news that the richest 1% of UK households are worth at least £3.6 million each, while the poorest 10% of households are worth less than £15,400 on average.

The inequality gap is ‘yawning’, it concluded — and not only that, also widening.

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Silver savers

Media spin isn’t wholly to blame, though. The facts themselves, when one reads the actual report, should not surprise. Older individuals are generally wealthier individuals.
Wealth was highest among those aged 55‑65, for instance, who have 25 times the wealth of those aged 16‑24. Almost three‑quarters of households with a retired head owned their home outright, compared with fewer than 30% of the self‑employed, and fewer than 20% of employee‑led households.
Moreover, retired households were not only wealthier than those of working age, but they also benefited from lower spending and a more stable income.

Private pensions outrank property

Dig a little deeper, and two further interesting facts emerge.
One is that the proportion of wealth held in private pensions is now the largest component of total wealth, at 42%.

The second is that while the proportion of total wealth held in private pensions has increased slightly over the last 14 years, the proportion of total wealth held in property (defined as the value of households’ residences, minus mortgage debt) fell slightly over the same period, and presently stands at 36%.
Tell that to the bloke down the pub who insists that real wealth is best accumulated in property, and not pensions and investments.

For canny investors, private pensions fit the bill

Now, the sensible statisticians at the Office for National Statistics aren’t in the business of idle speculation.
Nevertheless, they observe that the slight increase in pension wealth over the period might be explained by the introduction of the government’s automatic enrolment initiative, and by the increase in the State Pension age,  which might result in people contributing to their pension for longer.
Indeed. But that’s to ignore the elephant in the room.
Which is that private pensions have three significant advantages for those investors canny enough to recognise them, and exploit them.
Especially, in my view, when those private pensions take the form of Self-Invested Personal Pensions, or SIPPs.

Three advantages

The first of those advantages is that in a SIPP, you can readily buy and sell shares, just as you can in an ordinary brokerage account. Granted, ‘stakeholder’-style pensions and similar pensions generally allow you to do the same with funds, but that’s not quite the same.
And SIPPs don’t just permit investors to buy and sell shares in individual companies. The same goes for ETFs, funds, index trackers, investment trusts — you name it.
Second, SIPPs are free of both income tax and capital gains tax: what you make is what you keep. Think of it like an ISA, in that respect.
And third, speaking of tax, don’t forget the UK’s generous tax regime for SIPP contributions — and of course, other pensions, too. Pension contributions qualify for tax relief, and (under present tax legislation) that tax relief is granted at your highest marginal rate. For high earners, that could be worth 45% — with basic rate relief directly added to your SIPP account, as cash from the government.

Look in the mirror

All of which makes a pretty compelling case to those investors who are prepared to invest over the long term in order to ensure that they’re giving themselves the best possible chance of a comfortable retirement.

And that phrase ‘the long term’ is important, as it’s probably the real reason why pension wealth makes up so significant a proportion of overall household wealth.
Because money can’t be withdrawn from pension accounts until you reach retirement age — which is deemed to be 55 at present, but rising to 57 from 2028.
Your contributions — and the gains that you make — are locked in until then, building up additional wealth with every passing year. Unlike ISAs, there’s no dipping into that cash in order to fund holidays, new cars, or house extensions.
So if you’re currently investing in an ordinary brokerage account, or an ISA, then ask yourself this: why aren’t you investing via a SIPP, as well?

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