the times | Saturday December 18 2021 73Money
0 Fight with dividends
Emma Wall from the wealth manager
Hargreaves Lansdown suggests pick-
ing steady dividend payers. “Holding a
FTSE 100 tracker gives you a return
that comfortably beats inflation. Rein-
vest dividends and you can leave infla-
tion for dust,” she said. Over a year, the
index of the largest UK firms is up by
about double the rate of inflation.
For a managed option, Wall likes the
Threadneedle UK Equity Income
fund, which costs 0.84 per cent a year. It
has a yield of just over 3 per cent. Over
five years the fund is up 34 per cent
compared with a sector average of
26 per cent. Top holdings include the
drugs giants AstraZeneca and Glaxo-ture company Ferrovial; Vinci, a
French construction firm; and National
Grid. However, it is expensive, at
0.97 per cent a year. Over three years it
is up about 25 per cent compared with
a sector average of roughly 42 per cent,
according to the data firm Trustnet.
Dzmitry Lipski from Interactive
Investor, an investment platform, likes
the ClearBridge Global Infrastruc-
ture Income fund, which costs a more
reasonable 0.85 per cent. It is up 45.5 per
cent over three years.
Its holdings include the Spanish
electricity grid corporation Red Elec-
trica, and Brookfield Renewable, which
operates one of the world’s largest
renewable power platforms.O
ver the course of a 35-year work-
ing life the average person will
pay more than £79,500 in
national insurance.
That may seem a high price to pay to
qualify for the state pension, but you’d
need to save more than four times that
amount to guarantee the same benefits
in a private pension.
The state pension, which provides an
income for life once you turn 66, pays
out a maximum of £9,339 a year. This
figure increases annually by the highest
of inflation, average earnings growth or
2.5 per cent, although the link to earn-
ings has been suspended for a year.
If you wanted to replicate these bene-
fits privately, you would need to buy an
annuity, which pays out a guaranteed
income for life. According to the broker
Retirement Line, someone turning 66would need a pension pot worth
£330,949 to buy an annuity that match-
es the £9,339 annual payout and
increases annually with inflation.
This week the government an-
nounced a review of the state pension
to see whether it needed to adjust to
changes in life expectancy. This could
mean that the state pension age rises to
68 sooner than planned. You need at
least 35 years of full national insurance
contributions, known as credits, to
qualify for the full state pension.
“It is very easy to underestimate its
true value,” said Steve Webb, a former
pensions minister who is now a partner
at the consultancy Lane, Clark and Pea-
cock (LCP). “To match the secure and
increasing income provided by the
state pension you would need a pension
pot of more than a quarter of a millionSmithKline. Wall also likes Troy Tro-
jan Income, which is pricey at 1.01 per
cent a year but is up 25 per cent over five
years and includes the drink-maker
Diageo and the credit reference agency
Experian. Its yield is 2.4 per cent.0 Inflation-linked bonds
These bonds, essentially IOUs from
businesses and governments, pay an
income that is correlated to inflation.
However, they are expensive.
A net £1.3 billion was added to UK
inflation-linked bonds in the past year,
the data firm Morningstar said. $3.8 bil-
lion was added to US inflation-linked
bonds over the same period. Hollands
said: “Like most forms of protection youreally want it in place before you need it
to kick in. With inflation already high,
the risk of buying linkers now is that if
markets start anticipating inflation
abating in 2022, which most economists
expect, your timing may backfire.”
However, for those who do want
some exposure, Hewson suggests a
low-cost passive product such as the
Lyxor Core UK Government Infla-
tion-Linked Bond ETF. This tracks the
UK bond market for 0.07 per cent a
year.
For a managed fund, she tips the
Personal Assets trust managed by Se-
bastian Lyon from Troy, which costs
0.75 per cent a year. The fund has more
than 30 per cent in index linked bondsand 11 per cent in gold, which should do
well in times of inflation alongside
some high quality equities and cash.0 Cut costs
The only sure way to have a chance of
beating inflation is to keep costs down.
Charges for funds highlighted above
are on top of any platform fee, typically
0.25 per cent to 0.6 per cent a year. If
you use a financial adviser to make
investments expect to pay a further
0.5 per cent a year plus up to 3 per cent
of any new money you add to the fund.
A 1 per cent overall charge for
investing will mean losing about 25 per
cent of profits over 30 years. At 2 per
cent a year, you will give up about half.Don’t underestimate the value of a state pension
pounds, yet most people will have con-
tributed far less than this over their
working life.”
National insurance is levied at 12 per
cent on anything you earn between
£9,568 and £50,270, and then 2 per cent
at higher amounts, so someone earning
the average salary of £28,500 would pay
about £2,272 a year — £79,500 over the
35 years needed to get the full state pen-
sion. Even a worker on a higher salary
would have to pay almost twice as much
into a private pension as they would in
national insurance contributions to get
the same level of pension income.
Someone on £60,000 for 35 years
would pay £177,760 in national insur-
ance, for example, about 53 per cent of
the £330,949 needed for a comparable
annuity. Employers also pay national
insurance contributions for each em-
ployee, at a rate of 13.8 per cent of your
salary above £8,840.
It is estimated that the state pension,
paid to about 12.5 million people, will
cost the government £105.3 billion for2021-22. How much you get depends on
your national insurance record and
when you reached state pension age. If
this was before April 6, 2016, you would
get the basic state pension of £137.60 a
week (or £7,155.20 a year), plus any state
second pension (Serps) that you may
have accrued. Anyone retiring after
April 6, 2016 can claim the new statepension of £179.60 a week (£9,339 a
year), although if your entitlement
under the old state pension was higher
you could still claim that.
When you approach state pension
age, you should get a letter from the
government (no later than two months
before the date) which will tell you how
to claim it. You can also apply online onthe government website if you are with-
in four months of the state pension age.
The age you qualify for the state pen-
sion is to increase from 66 to 67
between 2026 and 2028, and to 68 by- Bringing the 68 threshold for-
ward to 2037 could save the govern-
ment £55 billion, according to LCP.
“The government needs to make sure
that decisions on how to manage its
costs are robust, fair and transparent for
taxpayers now and in the future,” a
Department for Work and Pensions
spokesman said.
“It must also ensure that as the popu-
lation becomes older, the state pension
continues to provide the foundation for
retirement planning and financial
security.”
Helen Morrissey from the wealth
manager Hargreaves Lansdown said:
“Someone might have a life expectancy
of 80 but not all that time will be in good
health. Many people will find it impos-
sible to work up to and beyond the
current state pension age.”
Paying out £79,500 in national insurance may
be painful but it’s a good deal, says Imogen Tew
£9,339
a year’s full state pension. It is
guaranteed to go up each year2005 2010 2015 20208%7 6 5 4 3 2 1 0Source: ONSThe household bills of
people in their forties and
fifties will rise almost
£2,000 a year after the
cost of living hit its
highest level in a decade.
The Times’s inflation
index compiled by the
insurer Aviva shows that,
although the Office of
National Statistics’
Consumer Prices Index
rose by 5.1 per cent in the
year to November, the
true cost-of-living rise will
exceed this for every age
group other than the very
youngest and oldest.0 The squeezed middle
The worst-hit will be the
7.5 million households
aged between 50 and 64,
making up 27 per cent of
the UK total. This group
spends an average of
£661.40 a week and will
face the highest overall
level of household
inflation of 5.21 per cent.
This age group is likely
to spend about 15 per
cent of their weekly
budget on transport. This
means the 29.5 per cent
annual rise in the cost of
petrol will hit them hard,0 The benefit of being
young — or older
The 2.5 million under-30s
will enjoy an inflation-
beating 4.92 per cent rate
because of the likelihood
that they live in a city and
use public transport, not
a car, while their homes
will be cheaper to heat.
Their spending, at
£592.80 a week, is likely
to be heavily biased
towards rent, with
housing costs making up
26 per cent of their
budget. Rents have risen
only 1.9 per cent in a year.
Similarly, the 4 million
over-75s can expect to
experience a real life
inflation rate of 4.77 per
cent. This age group
spends £356.10 a week,
the lowest of all groups.0 The pricelist
Some 720 items are
monitored to determine
the inflation figure.
Second-hand cars have
risen 27.1 per cent, fridge-
freezers 10.3 per cent and
sporting event tickets
8.4 per cent. On the plus
side, chocolate is up only
1.7 per cent, beer 2 per
cent and museum entry
1.6 per cent. Now the
baking fad has passed,
flour is down 10.3 per cent.6 Find your real inflation
rate with our online
checker at thetimes.co.ukand they also face an
18.8 per cent rise in
electricity costs.
On the plus side, they
spend the most of any
age group on recreation
and culture, at 16 per cent
of their weekly budget, so
will take advantage of the
lower 3.3 per cent rise in
prices in this sector.
Aviva says that, given
the November inflation
figures, they can expect
to spend an extra £34.56
a week — £1,791.86 a year.
The 9.5 million
households aged 30 to
49, who are juggling
families, higger homes
and commuting, already
have the largest average
spend at £666.70 a week.
Inflation for them will be
about 5.12 per cent
because of their reliance
on petrol (14 per cent of
overall spend) and
spending on homes
(also 14 per cent). They
can expect to pay
£34.74 extra a week —
£1,806.22 over a year.
The Bank of England’s
base rate rise from 0.1 per
cent to 0.25 per cent will
affect this group the most
because they spend a
large chunk of their
income on mortgages.
For 2 million borrowers
on variable or tracker
rates, payments on a
£100,000 mortgage will
go up £8 a month.inflation
indexMuseums +1.6% For most, inflation is even worse than it looks
(current inflation 5.1%)Beer
+2%Chocolate
+1.7%Beating inflation