How Government Borrowing Costs Will Be Crushing People's Retirements AGAIN

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There has been a lot of press coverage in recent weeks around the UK government’s borrowing costs and how a rise in gilt yields means it’s costing more to service our debt. Whilst this has impact on the government’s spending plans and means less money for public services it can also negatively affect your pension, particularly if you are close to retirement. We have been here before back in 2022, which culminated in the fallout from the Liz Truss and Kwasi Kwarteng ‘mini-budget’. Some of you may have suffered the shock of seeing a large fall in the value of your pension around this time which would have rocked your retirement. The bigger issue here is not successive government incompetence (that will likely continue and there is nothing we can do about that until we get decent politicians) but the investment strategy you are using for your pension. Unfortunately, you have been given a rubbish pension investment product. It’s important to learn the lessons quickly from 2022 to avoid a repeat. It’s your pension investment strategy that is the problem In trying to be clever the pension industry came up with default/lifestyle funds. These are the investment funds your pension money will likely automatically be placed into if you do not make your own choice. The idea with default/lifestyle funds is that they automatically change the investment strategy you use as you approach retirement. Whilst you are young and just starting out, you will be heavily invested in ‘growth’ assets like equities. As you get to within a few years of retirement you will be more invested in ‘defensive’ assets like bonds. The idea sounds good in theory. Protecting what you have built up in your pension pot, so it is ready for your retirement. However, the concept has a number of flaws. How rising borrowing costs hurt pension default/lifestyle funds The ironic thing about default/lifestyle investment funds is that at times they are anything but defensive or safe so it’s misleading to describe as this. All caused because default/lifestyle pension funds are not the things to be invested in when you hear government borrowing costs are rising. The reason for this is because the value of fixed interest or bond investments including lending to the government in the form of gilts goes in the opposite direction of the interest rate. Bonds are loans to governments or companies. The amount of the loan and the interest rate will be set at the outset. These bonds are then traded on public markets. If more people want to buy bonds, then their value will rise but because the interest rate is fixed it will have the effect of reducing the yield you get. It works the other way round if there are more sellers than buyers. In this scenario you could pick up a bond at a lower value than what will be repaid meaning your fixed interest rate gives you a higher effective yield. When it comes to government borrowing much will depend on how markets see the UK’s future prospects. If they think there is a danger the UK government will struggle to pay its bills in the future, then it will demand a higher interest rate for lending to the government. This has knock on effect on all gilts being traded in the market and effectively lowers their price. Meaning a pension fund heavily invested in gilts and bonds is going to see its value fall. Avoiding government borrowing costs ruining your pension To avoid being in the horrific position of seeing your pension fall dramatically just at the point you retire you need to take control over your pension investments. Whatever you do make sure you take an interest in your pension and be clear on what the investment strategy you are using really does. Don’t be fooled by the workplace pension marketing, nothing is entirely ‘secure’, ‘defensive’ or risk free. Everything has pros and cons and it’s important to know the economic conditions that suit different assets. #borrowingcosts #pensions #lifestylefunds