Pensioners are expected to lose up to £11,000 in retirement savings under a “volatile” policy proposal.
The Labour Party has pledged to force pension funds to switch investments to UK-based companies if its wins the upcoming General Election on July 4.
Sir Keir Starmer has promised to raise investment from pension funds in the UK market which has many older Britons concerned about the fate of their savings.
According to research conducted by wealth management firm True Potential, the average pension fund will be £11,000 worse off over the next 37 years if funds were invested in FTSE shares in lieu of global equities.
As it stands, the average pension fund for a Briton aged between 18 to 34 years old comes to £9,300.
If a 30-year-old’s fund is invested into the FTSE All-Share Index, this amount in savings would be worth £124,360 by the time they retire at 67.
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In comparison, if the exact same pension fund was invested in a global equities index, such as the MSCI ACWI, it’s worth would be raised £180,165 over the same period.
This is £55,805 more in retirement savings than if the pension pot had been invested domestically in a UK company.
Hypothetically, if 20 per cent of investments were switched from the MSCI ASWI to the FTSE All-Share, a retiree would have missed out on £11,161 in investment growth by the time they hit pension age.
It should be noted that this breakdown takes into account the two-decade average annual growth rate for the FTSE All-Share being 7.26 per cent and the MSCI AWCI coming to 8.34 per cent.
One of Labour’s manifesto pledges includes bolstering pension fund investment into the country if the party returns to power.
Despite this, it is yet unknown what proportion of assets would need to be transferred over domestically, as well as whether funds will be forced or encouraged to switch over to UK companies.
The manifesto states: “Labour will also act to increase investment from pension funds in UK markets.
“We will also undertake a review of the pensions landscape to consider what further steps are needed to improve pension outcomes and increase investment in UK markets.”
Earlier this year, Chancellor Jeremy Hunt announced a similar commitment from the Conservative Party that all defined contribution (DC) pension schemes will legally have to disclose their investment in UK assets from 2027.
This came after the introduction of the Mansion House compact which saw the UK’s biggest DC scheme providers pledge to invest at least five per cent in companies based in Britain.
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Experts are warning of the impact the policy move could have on savers
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Neil Rayner, head of central advice at True Potential, cited the importance of there being more investment from the private sector into retirement funds.
However, he warned policymakers that plans to coerce pension funds to invest client money into the UK market may have a detrimental impact on many savers.
Rayner said: “This uncertainty could come at the cost of a future generation of retirees who are currently diligently saving up for their retirement.
“Restricting investments based on geography increases the risk and volatility for these portfolios which could harm long-term results and make financial planning far more difficult for millions of people.”