Setting Expectations: the election, interest rates, pensions and investments

This podcast isn’t personal advice. If you’re not sure what’s right for you, seek advice. Investments rise and fall in value, so investors could make a loss.

Full episode transcript

Susannah Streeter: Hello and welcome to Switch Your Money On from Hargreaves Lansdown. I’m Susannah Streeter – Head of Money and Markets.

Sarah Coles: And I’m Sarah Coles – Head of Personal Finance.

Susannah Streeter: And we’re recording this deep into the election campaign, which seems to have lasted for roughly two years – so we’re knee-deep in promises and pledges for the future!

Sarah Coles: Yes – and it’s a campaign that’s been as noticeable for the things that are off the table as for the things that are actually on it – not least the interest rate announcement, when the Bank of England chose yet again not to cut rates.

Susannah Streeter: So, we’ll be covering it all in this episode – from the impact of rates staying higher for longer to the implications of the election – in an episode we’re calling, ‘Setting Expectations.’

Sarah Coles: We’ll be looking at the election campaign with Anne Fairweather – our Head of Government Affairs and Public Policy – who’s been digging through the manifestos to find out what they mean for you.

So, Anne – this is like Christmas for you policy-nerds, isn’t it?

Anne Fairweather: Well, there’ll be plenty to unwrap – and I can take you through all the giveaways in the manifestos, but I’m not sure how festive any of us are feeling at this stage in the campaign. It’s been dragging on, hasn’t it?

Susannah Streeter: It certainly has – but we will be delving deeper into all the promises later in the podcast. We’ll also look at the future for interest rates – we’ll explore what they’re likely to mean for retirees – especially when it comes to annuities – with our Head of Retirement Analysis, Helen Morrissey.

Sarah Coles: We’ll also talk to Equity Analyst, Matt Britzman, about how higher rates are likely to affect some listed companies – and to Emma Wall – our Head of Investment Analysis and Research – for a fund management perspective.

Susannah Streeter: So, before we go any further, we should start with the election – and bring back in Anne Fairweather.

So, Anne – what have you been focusing on for us?

Anne Fairweather: The general election’s really imminent right now, so I wanted to break down the manifestos a bit – to see where the parties differ – especially when it comes to issues that affect savers and investors.

Susannah Streeter: Fair enough – so let’s start with the Conservatives. What was in the manifesto that caught your eye in particular?

Anne Fairweather: The Conservatives – they’ve really stuck to their theme of highlighting their desire to cut taxes. Within their manifesto, they included a pledge of a further National Insurance contribution cut by 2 pence. Taken with the previous 2-pence cuts, that amounts to a halving of the contribution level up to the upper-earnings limit, which is just over £50,000.

In addition to this, they pledged not to raise income tax rates, National insurance, or VAT rates – likewise with capital gains tax. They also committed to the current pensions tax arrangements. However, there is a ‘Watch out’ – tax thresholds don’t get a look in. In recent years, income tax thresholds have remained frozen, dragging more people into higher tax rates as incomes rise.

Susannah Streeter: Oh, the joy of fiscal drag! That’s something we have heard far too little about in this debate. Can you tell us what Labour have got planned?

Anne Fairweather: Labour took a similar approach on income tax, National Insurance, and VAT rules – so agreeing to freeze those headline rates through to the next election – but no mention of those tricky thresholds which we’re watching out for now.

Interestingly, they made no mention of any other taxes beyond specific tax rise they’ve already committed to – so that’s the VAT on private school fees, repeal of the non-dom status for longer-term residents, a windfall tax on oil and gas extraction, and a change to the tax treatment of private equity bonuses. This means that the Conservatives – who’ve got a wider range of tax freezes on offer – have continued to attack Labour, saying that they could raise taxes in other areas in the future. Labour’s response to this has been that there’s nothing in their manifesto which requires further taxation.

Susannah Streeter: But it’s not all just about tax cuts, is it?

Anne Fairweather: No – although, interestingly, it’s only the Green Party that’s really going into this election with plans for significant tax rises – extending the 8% rate on National Insurance to higher earners, where the rate is currently just 2% – equalising capital gains tax with income tax, equalising pensions tax relief to the basic income tax rate, introducing a wealth tax on those with assets of over £10 million. These are all items on their agenda.

Behind this argument on tax, there’s actually one about spending. The Institute for Fiscal Studies have been accusing all of the main parties of a ‘Conspiracy of silence’ about future spending demands in an aging society.

Sarah Coles: How have the major parties responded to this challenge?

Anne Fairweather: The main parties – they need to pin their hops on stimulating growth to increase the overall pot to spend, and to avoid raising taxes or cutting spending. Here, the Conservatives are hoping that their plans on tax will help stimulate consumer spending. The Labour Party are talking about partnering with the private sector through a National Wealth Fund to stimulate spending on green infrastructure projects. The vision is that the funds would pull 3 pounds of private investment in for every pound of public investment, but there’s a lot of work to do on the structuring of the fund and attracting that money in the first place. Both main parties have also put forward proposals to free up planning laws and stimulate more housebuilding.

Susannah Streeter: On this podcast, we do love a pension, so we should ask what the parties have in mind for these too.

Anne Fairweather: On pensions – all three main parties are committed to the triple lock on the state pension – and the Conservatives would go one step further, saying they would also keep the it out of income tax. On wider pensions reforms, Labour has signalled a plan to have a review and both of the main parties are interested in stimulating more investment into UK markets by pension funds.

Sarah Coles: We’ve covered plenty from Labour, the Conservatives, and the Greens – so what about the other parties?

Anne Fairweather: It’s interesting to see the Liberal Democrats focus their manifesto on their plans to improve the Social Care sector. It’s a tactical focus, building on the personal experiences of their Leader, Ed Davey. It’s a great example of how smaller parties can take a knotty issue and make sure that it doesn’t go unnoticed in a big election battle. Both Conservatives and Labour are committed to introducing the care cap of £86,000, but much more needs to be done if Labour is going to reach its ambition of a ‘National Care Service.’

That’s just a brief overview – and listeners in Wales and Scotland might want to look through the Plaid Cymru and SNP manifestos – and, of course, in Northern Ireland, you have a different set of choices. Finally, Reform are also polling high.

It’s definitely worth taking a look online – especially if you’ve got particular areas of interest and you want to understand how the political parties plan to tackle it. ‘Ctrl+F’ has definitely been my friend, ploughing through these tomes!

Susannah Streeter: Thank you, Anne – really good to catch up with all of these pledges, especially as Election Day edges closer.

Sarah Coles: So, of course, while the election campaign has been in full swing, one thing that’s ground to a halt is interest rate expectations, with the Bank of England holding rates for another month. So, we thought we should take a look at the prospect for rates.

Susannah Streeter: Yes – although inflation’s recent rollercoaster ride – we’ve finally come to a halt back at target. Policymakers still have their eye on hot-wage inflation, with earnings excluding bonuses still running at 6% at the last count.

But the effect of unemployment ticking up to 4.4% in April may have given them a bit less bargaining power – and may have made some workers more cautious in their spending patterns.

That certainly showed up in the latest economic growth figures, which showed activity in the Retail sector slow sharply, leaving the economy stagnating in April. May was warm but wet, which may have continued to affect demand.

However, an interest rate cut in August is still a very real possibility, but the markets aren’t fully pricing in a cut until September – and another further cut does look possible by the end of the year. In the US, the Federal Reserve also kept interest rates on hold at the last meeting, with only one interest rate cut now expected during 2024.

Sarah Coles: Of course, interest rates have an impact on all sorts of aspects of our finances, influencing the direction of the savings and mortgage markets.

The Bank of England’s inaction is great news for savers – and, with rates expected to stay higher for longer, the savings market is managing to hang onto rates above 5%. With inflation still likely to be falling, savers could capitalise on the opportunity to earn a guaranteed rate of return that’s almost double the rate of inflation right now.

Meanwhile, for borrowers, mortgage misery is set to stick around. The good news is that this shouldn’t endure for too much longer. If the data starts to point towards a cut sooner rather than later, we could see rates pull back in the coming weeks and months.

Susannah Streeter: It’s not just savings and mortgages though – it also affects annuities. So, this feels like a good time to bring in Helen Morrissey to explain a bit more about what’s going on.

Before we talk ‘Pensions,’ I should remind you that you can’t usually access money in a pension until you’re 55 (57 from 2028) – and that the Government provides a free and impartial service called Pension Wise for over 50s to help you understand your retirement options. You could also ask for advice if you’re unsure.

Helen – what is your take on the outlook for annuities?

Helen Morrissey: Well, we’ve been on quite the rollercoaster ride with annuities over the past coupe of years. They’ve gone from lingering on the sidelines of the retirement income market to taking on a much bigger role. Recent research from the ABI shows that annuity sales soared in 2023, with total sales value of £5.2bn. This is a 46% increase on 2022 and the highest annual value since 2014, which is when the pension freedoms were announced.

Sarah Coles: Oh, really? How come their fortunes have changed so much?

Helen Morrissey: So, prior to interest rates being hiked, annuity rates were in the doldrums. Data from our annuity search engine shows that, three years ago, a 65-year-old with a £100,000 pension could get just under £5,000 per year income from an annuity. However, interest rates are one factor affecting annuity incomes – so, as the Bank of England raised rates, then annuity incomes rose with them. A 65-year-old with a £100,000 pension can now get more than £7,200 per year from a single-life level annuity with a five-year guarantee paid monthly in advance – so it is a huge improvement. All quotes are based on the average postcode.

Susannah Streeter: That’s great news for someone in the market for a guaranteed income in retirement. However, you mentioned that interest rates do affect annuity rates – so what can we expect when the Bank of England starts cutting?

Helen Morrissey: The expectation is that once interest rates start to fall, then we will see annuity incomes start to fall back. They’ve been offering better value for a couple of years – and I think many would-be annuitants may have put off buying one for fear of missing out on higher rates later. However, with interest rate cuts on the horizon, it might prompt people to take the plunge in the coming months.

Sarah Coles: At least we aren’t expecting cuts for the next few months, so those considering annuities have time to prepare, don’t they?

Helen Morrissey: Yes, they do. It also looks likely that the Bank will take quite a cautious stance to reducing interest rates. As Susannah mentioned earlier, we aren’t expecting a cut to come until around August/September-time – and then only expecting one more by the end of the year. Any downward pressure on annuities should hopefully be gradual, but nothing is guaranteed. It’s also well worth noting that, if you’re worried about purchasing an annuity – and potentially missing out on higher rates – that you’re under no obligation to annuitise your entire pension at once. Instead, you can annuitise in slices throughout retirement and benefit from higher incomes as you age. As you age, you may also find that you qualify for an enhanced annuity, which can give your income a further boost. Remember though that, once purchased, an annuity cannot usually be changed, so it is important to consider all your options.

Susannah Streeter: Thanks, Helen. It’s impressive how far-reaching interest rate implications are – and not just for our personal finances, but for companies too.

This is a good time to bring in Matt Britzman, who’s been exploring how higher interest rates affect listed companies.

Matt – who have you been looking at?

Matt Britzman: I’ve lined up three names here – all with a slightly different rate angle. The first is a pure play from the Banking sector.

In general, banks tend to benefit from higher rates – they can charge more on the loans they give out. But too much of a good thing can cause trouble, as higher rates also increase the chance of loan defaults. It’s a balancing act that the banks are managing well for now.

NatWest is one of our preferred names in the sector. Its focus on traditional lending in the UK puts it in a nice spot to ride the wave of higher rates. Loan defaults remain low – and, with the return of real wage growth in the UK – and an improving housing market – there’s every chance borrowers can remain resilient. At the same time, banks are seeing easing conditions in the mortgage market and look to be closing in on a peak in terms of consumers shifting to higher-cost savings accounts.

With headwinds easing, the structural hedge can do its work. You could think of this like a bond

Portfolio that’s set to hopefully roll onto better rates over the coming years. NatWest is coming off some of the lowest rates in the sector and could be one of the biggest beneficiaries – although there are no guarantees, of course.

Banks have enjoyed a good run so far this year, but there are still risks from a new management team and an economic outlook that, while improving, is still uncertain.

Sarah Coles: So, that’s a bank – what’s next?

Matt Britzman: Next up, I wanted to go a little left-field and talk about Warren Buffett’s Berkshire Hathaway. Most people know Warren Buffett as a master stock picker – finding great value in brilliant businesses and holding them over the long term – but Berkshire, itself, is a little more complicated.

The core businesses include things like insurance and utilities. There’s then the portfolio of stocks, including significant holdings in companies like Apple and Coca-Cola. The large insurance arm brings capital that Buffett and the investment team can then invest. But, given the nature of insurance, a lot of that excess cash needs to be in low-risk and liquid assets – US government bonds, for example.

Now, the numbers here are quite staggering, so I’d forgive listeners for assuming this is a mistake. Berkshire is expected to have close to $200bn in cash and short-term investments – like government bonds – by the end of the year.

Part of the reason for having so much parked in short-term investments is keeping the business nice and liquid to support any shocks to the insurance arm. But it’s also in part because Buffett and the team are struggling to find investment opportunities that are significantly better than the 5% yields on offer from short-term US government bonds. While rates remain high, those risk-free returns are proving very attractive. Of course, should rates come back down, questions will start to be raised about what the plan is for that cash.

Susannah Streeter: What about something with less of a financial services link?

Matt Britzman: Finally, we turn to arguably the greatest brand on earth – Apple. Usually, tech and growth names haven’t tended to do well in a higher-rate environment. Without diving too deep into the maths at play, higher rates reduce the value of future earnings, so growth names mathematically attract lower valuations. But the Mega-Cap cohort in the US has bucked that trend, and high-quality names – like Apple – with the added catalyst of an AI craze – look well placed across a range of rate environments.

Now, Apple has been under pressure recently – and rightly so. The pace of innovation has slowed – new iPhones look remarkably similar to their predecessors, and people aren’t rushing out to upgrade like they may have done in years gone by. Some estimates suggest that close to 80% of iPhone users in the US are using models that are over three years old. But Apple’s just come out with this AI strategy, and there are enough new features – as well as a team-up with OpenAI – that it could trigger a surge in demand for the latest handsets.

Apple has a fierce combination of deep consumer and developer ecosystems alongside the hardware and software to get AI tools into the hands of everyday consumers.

It took some stick for being slow to the AI party – but, in hindsight, the cautious approach may end up being a shrewd move. But fancy new features aren’t a magic wand, and there’s still work to be done if it wants to convince consumers to fork out close to £1,000 for a new iPhone.

Susannah Streeter: Thank you, Matt – there is going to be a lot to keep an eye on in the months to come for companies. And there are questions for fund investors too – so let’s bring in Emma Wall, who’s been looking at funds in this environment.

As ever, before we start, we should point out that investing in these funds isn’t right for everyone. Investors should only invest if the fund’s objectives are aligned with their own – and there’s a specific need for the type of investments being made. Investors should understand the specific risks of a fund before they invest to make sure that any new investment forms part of a diversified portfolio. Remember – this is not advice or a recommendation to buy, sell, or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.

So, Emma – can you run through the kinds of companies that tend to be more sheltered in a higher-rate environment?

Emma Wall: Yes, of course. More mature companies that require less borrowing to fund their businesses are potentially more sheltered from higher rates. Limited borrowing will impact the higher cost of debt, which should have a smaller impact on overall profits. Additionally, there are some areas or sectors – such as financials – where higher interest rates created potential for higher levels of revenue and profits.

Therefore, we think an area of interest could be an equity income fund, which is likely to have a higher amount invested in large companies compared to some funds focused on growth. Equity income funds also tend to have a good amount invested in financials. One potential option to consider would be something like Artemis Income.

Sarah Coles: What d’you like about income funds, in general?

Emma Wall: An income fund can be a great addition to an investment portfolio for different reasons. You can either take the payouts to supplement your income, if needed – or, if you’re targeting growth, you can reinvest those dividends, which can help grow your pot at a faster rate – thanks to the effect of compounding.

Susannah Streeter: And what about this fund in particular?

Emma Wall: The Artemis Income fund currently has around 30% invested in the Financial sector, which has the potential to benefit if interest rates remain high. At the same time, the large companies that the funds tend to prefer to invest in are less likely to be significantly negatively impacted by a period of higher interest rates.

As a result, the fund could help form the foundation of a portfolio focused on income, provide some UK specific investments for a more globally invested portfolio, and provide diversification to a portfolio focused on growth.

I should add that the fund takes its charges from capital, which can increase the yield, but it can reduce the potential for capital growth.

Sarah Coles: So, what about other funds in this kind of environment?

Emma Wall: Following the rate hikes, bonds are offering yields today that have not been available for years. Bonds issued by more risky companies could be at higher risk of default though, so care does need to be taken in what investments you make in this space. But something that focuses on higher quality corporate bonds makes sense to us. These issuers are unlikely to be as badly impacted by increases to their cost of debt caused by higher interest rates, and they offer potentially higher yields and returns than government bonds – although, of course, no returns are guaranteed.

Something to have a look at would be Fidelity Sustainable MoneyBuilder Income. Investment grade corporate bond funds are a good way of taking advantage of the higher interest rate environment. Yields from this sector are higher than they have been for some time, meaning that without any changes in interest rates, many funds in this sector have the potential to provide mid-single-digit returns annually from here.

Susannah Streeter: What more can you tell us about this particular fund?

Emma Wall: The Fidelity Fund has a yield of around 5%. It has the potential for returns to be better than cash and has some potential for capital gains if interest rates were to fall in the future.

As an investment grade bond fund, the managers invest in corporate bonds issued by companies that are less likely to default on their bond payments than those that focus on higher-risk areas, such as high yield.

And the fund could act as a good diversifier for a portfolio focused on shares, or provide diversification for a portfolio based on income.

I should point out that the fund can use derivatives and invest in high-yield bonds, both of which add risk.

Sarah Coles: What about for younger investors who have a longer-time horizon to invest for? Even though bonds are offering more value, aren’t their returns relatively limited?

Emma Wall: Ultimately, a bit of asset-class diversification is something that’s useful for all investors, regardless of their time horizons. However, it might mean a bit more monitoring of your portfolio to make sure that the balance between shares , or equities, and bonds remains suitable. If this is a concern, some investors might prefer to make use of a multi-asset fund, which can help manage the balance of assets in their portfolio on their behalf.

Susannah Streeter: So, what d’you like in this space?

Emma Wall: A fund we like in this space is BNY Mellon Multi-Asset Balanced Fund.

Mixed asset funds normally invest in a mix of different investments, including shares, bonds, commodities, property and currencies. Each one is slightly different, but the principle is the same: a greater level of diversification should mean fewer ups and downs in your investment over time. This could be a useful attribute in a world of higher interest rates for longer.

This fund likes to keep things simple, usually investing in a combination of shares, bonds, and cash. A diversified approach could be beneficial as the impact of higher interest rates begin to impact the economy.

The manager keeps the fund relatively concentrated compared to other multi-asset funds. In a world where higher interest rates could be more damaging to some companies than others, this concentrated approach could be beneficial.

The fund could help to diversify a portfolio focused on shares – or add some growth to a more conservative portfolio.

It’s worth mentioning that the fund can use derivatives and invest in high-yield bonds, emerging markets, and smaller companies – which, if used, all add risk.

Sarah Coles: Thanks, Emma – there’s plenty to consider when investors are weighing up funds. Further research on these funds can be found on our website, along with the charges and risks and Key Investor information.

Susannah Streeter: So, now it’s time for the stat of the week – and, for a change, we thought we’d bring back Anne – for a glimpse into another aspect of the election.

Anne Fairweather: Yes – coming from me, it had to be about elections. To be specific, it’s about voter turnout, in particular.

So, did you know the general election turnout in the modern age peaked in 1050, with a whopping 83.9%. It stayed over 70% up to 1997 – but, since then, it’s dropped.

So, my question to both of you is, ‘Just how far has it dropped?’ – and, because I’m feeling generous, I’ll give you a choice.

Is it: three-fifths, two-thirds, or a half?

Susannah Streeter: Well, I know it’s surprisingly low, so I’m going to go for three-fifths.

Sarah Coles: I’m gonna be slightly more optimistic and go for two-thirds.

Anne Fairweather: I’ll have to give it to you both – because, depending on the election in question, it’s somewhere between those two points. So, there’s millions of potential voters who are missing out.

Susannah Streeter: That is a really striking figure. Plus, of course, there is a risk that even those who set out to vote might not be able to this time.

Anne Fairweather: Yes – so, if you have a postal vote, you have up until 4^th July to send it off. If you haven’t sent your postal ballot, you can – on Thursday 4^th July – just take it down to the polling station. If you’re voting in person, don’t forget to take photo ID with you – because you will need that in order to vote this time. If you need any more information on all of this, just go to GOV.UK and type in your question.

So, don’t forget to have your say.

Susannah Streeter: Really good to see you, Anne – you never take a minute off from encouraging more political engagement.

Sarah Coles: [Laughs] Yes – even after this marathon election campaign.

Anne Fairweather: It’s nothing – you just have to build up your political stamina.

Susannah Streeter: Or just go and have a lie down in a darkened room! [Laughs] There is chance for that now because that’s all from us for this time. But, before we go, we do need to remind you that this was recorded on 21^st and 24^th June 2024 and all information was correct at the time of recording.

Sarah Coles: Nothing in this podcast is personal advice – you should seek advice if you’re not sure what’s right for you. Investments and any income they produce can rise and fall in value, so you could get back less than you invest – and past performance is not a guide to the future.

Susannah Streeter: And this hasn’t been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.

Non-independent research is not subject to FCA rules prohibiting dealing ahead of research – however, HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing.

Sarah Coles: You can see our full non-independent research disclosure on our website for more information. So, all that’s left is for us to thank our guests: Anne, Helen, Matt, Emma, and our Producer, Elizabeth Hotson.

Susannah Streeter: Thank you very much for listening. We’ll be back again soon – goodbye!