As we turn our attention to this year’s Mansion House speech, all eyes are on Chancellor Rachel Reeves as she prepares to unveil a package of measures aimed at revitalising retail investment in the UK. Central to her address will be long-anticipated reforms to the boundary between financial advice and guidance, a step designed to give savers more confidence and clarity when making investment decisions.
Susannah Streeter, head of money and markets, Hargreaves Lansdown comments:
“Rachel Reeves has been putting the upset in Parliament behind her, and her Mansion House speech is an opportunity to seize the growth and stability narrative. It’s the chance to reassure investors that the government has capital markets at the heart of its plans to get the economy powered up again. The wealth-creating potential of markets is still being held back. Not enough ordinary people have the confidence to invest, while companies remain challenged by the costs and complication of listing rules and requirements.
Lower liquidity on the London markets has also been cited as a reason for companies de-listing from the LSE or opting for New York for an IPO. To try to keep firms interested in London as their launch pad, listing rules have already been eased. New reforms are expected to be announced, cutting red tape further by simplifying requirements for a pre-offer prospectus to be drawn up. They may also eliminate the need for a prospectus to be drawn up for some companies, enabling them to raise capital at a lower cost. All of this will be good news for retail investors, allowing companies to raise more capital from these investors, without incurring significant regulatory costs. While efforts to draw on the capital might of huge pension funds to support the London market have been unveiled, there will be an emphasis on supporting retail investment.
One of the most efficient ways of incentivising ordinary investors would be to cut stamp duty on shares. It is unreasonable that investors buying UK shares have to pay stamp duty when most overseas share trades are stamp duty free. We should be brought more in line with most other G7 countries and see the playing field levelled for the UK. The Office for Budget Responsibility is forecasting that the tax take from stamp duty on shares will rise by 2030 to hit £5.1 billion annually, from £4.2 billion currently. However, this is still a tiny proportion of the pie compared to income taxes which account for £310 billion of the Treasuries revenues. If stamp duty on shares is cut, there may be an initial hit to the coffers, but if it encourages more people to dip their toe into the London market, it could help revitalise the UK economy and create an investment culture in the UK and help the economy grow.”
Advice/guidance
Sarah Coles, head of personal finance, Hargreaves Lansdown
“The real gamechanger for closing the investment gap in the UK is the changes in the pipeline to the amount of targeted support companies can give people, to help them understand the right mix of assets for people like them. This is going to help bring about a step change in retail investment in the UK, so tinkering with the cash ISA allowance is a needless distraction. The speech will announce the next step, a consultation into the change in legislation, to allow for regulatory space for this change. It’ll be a hugely welcome step along the road to building an investment culture in the UK.
Cash ISA
There’s a risk that the cash ISA allowance will be the major casualty of the Mansion House speech, with rumours it could be cut to £10,000 or even £4,000. This would be a horrible blow for diligent savers. Nearly half (49.5%) of HL clients put more than £15,000 into their Cash ISA. Two in five (42%) pay in between £19,000 and £20,000. If they’re saving for the short term, cash is the right home for their money, so they would end up being forced to pay more tax through no fault of their own.
If they have a longer time horizon and they’re still in cash, then the reason they’re not investing yet isn’t anything to do with tax. It comes down to the fact they’re not comfortable with investments because they don’t know enough about it. Punishing them with a lower cash ISA allowance would do nothing to change that.
In fact, it could end up doing more harm than good. It risks undermining people’s faith in the security and certainty of ISAs. Our experience also shows that over time, huge numbers of cash ISA holders will build their familiarity with investments, open stocks and shares ISAs and transfer from cash to investments. Our data shows more than a third of clients (36%) who initially open a cash ISA go on to invest with HL within a year. This trend is far more striking than the move from regular savings accounts to investing – where it’s between a fifth and a quarter. By limiting how much they can put into cash ISAs in the interim, there will actually be less to move into stocks and shares ISAs in the future. It risks having precisely the opposite impact to the one the government might have in mind.”
Pensions adequacy
Helen Morrissey, head of retirement analysis, Hargreaves Lansdown:
“Rumours are starting to swirl that the government will use the Mansion House speech to kick start the second part of its Pension Review. This piece of work will look at adequacy and will inform government thinking on the state pension as well as workplace pensions for years to come.
Auto-enrolment has done a great job of getting more people saving into a pension, but the all-important next step is asking if people are saving enough, and if not, what is enough? The answer to this means different things to different people and this is why minimum contribution rates should not be hiked across the board. Such an approach risks lower earners over saving and potentially leaving themselves in financial difficulties in the here and now. However, thought also needs to be given to those earning a bit more who are potentially under saving by sticking to auto-enrolment minimums and could face a nasty shock at retirement when they realise they haven’t saved anywhere near enough to fund their lifestyle.
Getting this right is hugely important in determining how the state pension should be uprated, so it forms an effective foundation for people’s savings, with workplace pensions building on this resilience.
It’s an area HL has analysed in recent research using the HL Savings and Resilience Barometer which looks at different adequacy measures and what they mean for different groups. It determined that the Living Pension should be used as a minimum income underpin. Target replacement rates which target a level of income based on someone’s pre-retirement earnings should then sit on top of that as a guide for what people should be targeting.
For instance, if you were looking to target 66% of your pre-retirement income, someone earning £30,000 pre-retirement would target an in-retirement income of £20,000 per year. Someone on £60,000 per year would target more like £40,000.
The idea is that state pension and minimum auto-enrolment contributions would help lower earners hit their target replacement rate and higher earners would be encouraged to contribute over and above these minimums to hit theirs. It’s an approach that could go a long way towards helping workers build a retirement income that meets their needs.”
