Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
Here are some reasons to be more cheerful about your money
Whether it’s been tax hikes, the cost of living crisis, or the war in Ukraine, doom and gloom hasn’t exactly been hard to find in April. The downbeat mood around household finances is palpable, and understandably so, with the price of essential items rising so rapidly.
At tough times like these, we find it natural to focus on the problem at hand, and batten down the hatches. But it might also help to cheer ourselves up a bit by remembering the positive developments we have seen in the personal finance arena in recent times.
Let’s start with the stock market. It’s been a decent period for investors, with £10,000 invested in the average global fund 10 years ago being worth £28,230 today. Even an investment in the spluttering UK stock market would have more than doubled your money, turning £10,000 into £20,360, if you had purchased a typical UK equity fund.
Right now, there are quite legitimate concerns around the valuation of the US tech sector, and the potentially damaging effect interest rate rises and inflation may have on global economic growth.
These issues raise the question of whether a stock market correction is waiting in the wings. This is actually always a possibility, and simply part and parcel of stock market investing. But the good news is that even if share prices take a big tumble, many investors would still be sitting on a healthy profit, thanks to the returns made by the global stock market over the last decade.
The cost of investing has also fallen significantly over the years. 1% used to be a fairly competitive dealing commission for stockbrokers to charge twenty years ago. So on a £10,000 trade, you might pay £100 in dealing fees. Now you’re more likely to pay a flat fee somewhere in the region of £10.
Indeed, some platforms don’t charge any commission for share deals. Annual fund charges have come down significantly over the years too. It’s now possible to invest in a plain vanilla index tracker fund for as little as 0.2% a year, including platform charges.
By way of contrast, consider that when the government introduced stakeholder pensions as a ‘cheap’ option for savers in 2001, the annual charges were capped at what was then a competitive 1% a year, and the funds on offer were largely passive.
Pensions themselves have also made great progress. The pension freedoms introduced in 2015 mean that savers have much more control over how they draw on their pensions, rather than being shunted into an annuity.
As interest rates have tracked lower, and taken annuity rates with them, the pension freedoms have undoubtedly helped many people avoid locking into a low income stream for life. It’s also almost ten years since automatic enrolment was introduced, which requires employers to set up, and pay into a pension for their staff.
Since the reforms were introduced in 2012, the proportion of private sector workers saving in a workplace pension scheme has more than doubled from 32% to 75%.
Critics will say that the 8% total contribution rate doesn’t go far enough to replace the final salary schemes of yesteryear. That may be so, but the cost of final salary schemes simply became unaffordable as life expectancy shot up. That was a good thing of course, but with financial consequences.
Detractors can also point to the fact that automatic enrolment doesn’t do anything for the self-employed, who have to fend for themselves on the pensions front. Again, that’s true, but the numbers show that automatic enrolment has still been a success story, and offers a good foundation from which it can be expanded.
That’s particularly the case when you consider that at the launch of the scheme, naysayers predicted automatic enrolment would simply flop, because workers would just opt out in their droves.
A MENTION FOR ISAS
The humble ISA is also worthy of an honourable mention. It’s a tax shelter that can all too easily be taken for granted. The £20,000 allowance is now extremely generous, and is supplemented by a £9,000 allowance for Junior ISAs too.
That compares to an annual allowance of £7,000 when ISAs were introduced in 1999. We often expect tax allowances to be uprated in line with inflation. Well, if that had been the case for ISAs, the annual allowance would now be just £11,350.
None of this is to whitewash the genuine financial pain that is being felt by people up and down the country, but if you want to read about that you have plenty of options right now. Hopefully some of the positive developments listed above might make you feel a bit more upbeat about the current state of personal finances, if only for a while.