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The current situation facing the UK feels all too familiar.

Consider the facts: soaring inflation; strikes; a very real risk of recession; and an increasingly unpopular UK government. Kate Bush tops the charts, Tom Cruise stars in a Top Gun sequel, while the Rolling Stones, Elton John and the Eagles are playing to huge audiences.

Anyone could be forgiven for thinking that the clock has been turned back 40 or 50 years – especially if you’re old enough to remember all that the first time around. But, despite the recent heatwave, it’s definitely not 1976, writes Christine Hallett, managing director of Options UK.

But there’s no doubt that there are some striking similarities between the 1970s and 2022.

For example, between 1970 and 1979 the cost of oil rose 16-fold, from $2 to $32 (£26.7, €31.5) a barrel. This was largely a result of OPEC raising the price of oil by 17% in direct retaliation to the West’s support for Israel in the 1973 Yom Kippur War, and the 1979 Iranian revolution.

By comparison, In April 2020 a barrel of oil cost less than $20; by March 2022 the price had multiplied more than 6-fold, to $124.40. Once again, the continued upward surge in oil’s value, which started as a direct consequence of the pandemic, has been driven by war, this time in mainland Europe, and it has driven global inflation.

Inflation

Ah, yes, inflation. As recently as 2020, the UK’s inflation rate was 1.5%. Now, it officially hovers around 9% but in reality is almost certainly nearer to 12%. The situation mirrors that of the mid-1970s when inflation spiked at 12.9% between September 1973 and March 1974. The Heath government brought in the three-day week in 1973 and there were power cuts as electricity was rationed during industrial action by coal miners and railway workers. Under Labour from 1974-79 the economy sank into recession and unemployment soared.

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The election of the Conservatives in May 1979, under the leadership of Margaret Thatcher, represented a pivotal moment in British post-war politics. One of the Thatcher government’s most radical achievements was the restructuring of Britain’s pension system, primarily through the ‘personal pensions revolution’.

The government harboured very real concerns regarding the future burden of the state earnings-related pension scheme (Serp). Their preferred alternative was to use personal pensions to build a capital-owning democracy, although it wasn’t until 1986 that the ‘personal pension’ revolution arrived, serving to reshape the British pension landscape for decades.

Pensions

According to the Office for National Statistics (ONS), in 1977 the annual UK state pension was £5,604, while average private pension payouts totalled £1,815 per annum. By 2016, the state pension had risen by 96%, to £11,018, while average private pensions had grown by 585%, to £12,431 ($14,900, €14,700).

Today, pensions have become the largest component of household wealth, a fact of economic life which even the pandemic has been unable to change.

The 2022 edition of the ONS’ Wealth and Assets Survey reiterates the point, identifying four main components of household wealth: net property value; physical assets, net savings and private pensions.

Many people will be surprised to learn that while property accounts for 36% of average household wealth, private pensions account for 42%.

The Wealth and Assets Study found that where the household head was aged between 55-66, total domestic wealth was 25 times higher than the youngest households.

The study noted that: “Typically, wealth accumulates with age [while] the size of pension contributions is positively correlated with income – which also increases with age. This means wealth is likely initially to build slowly before growing at a faster rate until retirement.

“After state pension age, household wealth declines as one of the primary assets, pension wealth, is drawn upon, typically in the form of lump sums and annuities.”

Sipps

It’s worth noting that although markets remain volatile and the economic backdrop apparently less than encouraging, the FTSE 100 has risen by 2.6% over the past twelve months. Moreover, one of the most significant benefits of a self-invested private pension (Sipp) is the platform’s built-in ‘margin for safety’.

Sipp members enjoy two main benefits. First, their investments grow free from capital gains and income tax, but it is the second benefit which is perhaps even more valuable, especially when investment markets remain unpredictable.

The tax relief afforded to Sipp members depends upon their individual circumstances, but most importantly, it adds a Treasury-funded uplift, an investment ‘buffer’ capable of absorbing even significant losses.

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Personal Sipp contributions attract basic rate tax relief at 20%, which means an investment of £800 is topped up to £1,000 courtesy of the Treasury uplift. Higher-rate taxpayers investing £8,000 receive the basic rate relief, adding a further £2,000 to their contribution plus an additional  rebate of £2,000. This means a £10,000 Sipp contribution costs only £6,000.

Though the FTSE 100 was launched in 1986, two of its biggest annual falls came more recently. In 2020, it suffered a pandemic-inspired drop of 14.3%, while the 2008 financial crisis wiped 31.3% off the index. The figures highlight the value of tax relief uplifts to Sipps.

Although we appear to be reliving the 1970s, this could be the perfect time to invest via a Sipp and take advantage of generous tax breaks while they’re still available, particularly when one considers the Treasury-funded margin of safety automatically assigned to Sipp members.

This article was written for International Adviser by Christine Hallett, managing director of Options UK.

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