Why its time to look to the market for retirement savings

At first sight, Chancellor Rachel Reeves’ 2025 Budget did not appear to do long-term savers many favours. But could her announcements nudge people in the right direction?

As well as reducing the amount that people aged under 65 can save into a cash ISA each year from April 2027, from the full £20,000 allowance to just £12,000, the Budget also included plans to increase tax by 2% on both investment dividends and savings interest (from April 2026 and 2027 respectively).

The income tax rises are a clarion call for savers to make the best possible use of their annual ISA allowance as a priority. But the slashing of the cash ISA limit means that if they are to maximise the amount of savings they shelter from tax, they will need to turn to a stocks and shares ISA account for at least part of it.

The volatility of stocks and shares ISAs may have been a reason why some savers have historically favoured the certainty of cash ISAs. However, at the same time as the allowance is slashed and the tax of cash interest is hiked, interest rates on cash ISAs are falling. With economists anticipating more base rate cuts, it is set to become harder to find savings accounts paying more than 4%.

This further increases the incentive to venture into the stock market, assuming you have time on your side and can tie some money up for at least three years and preferably longer. And once you’ve decided to seek exposure to stocks and shares, there is a strong argument for UK equity income as a great area to explore.

Having peaked at just under 7000 in 1999, the FTSE 100 index of the UK’s largest companies did not breach the 8000 ceiling until May 2024; it is now sitting just below the 10000 mark, having risen just under 20% during 2025. Such a strong rally indicates a change of sentiment as investors have started to return to a market unloved for over two decades.

Despite this rally, the UK equity market is still cheap in comparison with other equity markets around the world, trading at a Price/Earnings ratio of 13x compared the US equity market at 21x, Japan at 17x and Europe at 15x.

Although the UK’s headlines have been dominated by domestic economic weakness and political uncertainty, the corporate landscape by and large remains in good shape, with many companies growing profits and using those profits to pay down debt, invest in their operations, buy back their own shares, and pay attractive dividends.

With this backdrop, there is no shortage of well-managed businesses with strong earnings prospects for stock-picking managers such as the team at Aberdeen Equity Income Trust (AEI). Against a challenging economic backdrop, we see merit in a highly selective ‘best ideas’ approach, seeking out companies that are well placed to generate cash flows and use those cash flows to pay dividends.

The beauty of equity income investing is that shareholders potentially receive a dividend income as part of their investment returns. In the case of AEI that’s an attractive 6% p.a. at present – well above the best of the cash ISA payouts. While dividends are not guaranteed, they can be less volatile than shares and can help shareholders visualise the make-up of their returns.

The Trust’s status as a “Dividend Hero” helps underline the consistency of its dividend track record. The Dividend Hero accolade is awarded by the Association of Investment Companies to trusts that have maintained or grown their dividend payouts for more than 20 consecutive years and has become a coveted badge of honour among income-focused investment trusts.

With 25 years of dividend growth under AEI’s belt, the team will do all they can to protect that hard-won record. While there is no guarantee that this dividend growth will be maintained, the fact that the Trust was able to use its reserves to keep growing the dividend during the Covid crisis - despite around half the companies on the stock market cancelling their dividends – acts as a useful indicator of its robustness.

AEI’s track record provides some evidence on how the team’s stock-picking strength can underpin an attractive and growing dividend and capital growth. To 31 October 2025, the Trust beat the benchmark FTSE All-share index in total return terms over one, three and five years. To date in 2025 it has gained 28%.

At a time when the attractions of cash savings are starting to dim, it could be time to consider the dividend-rich UK market. Share prices might be unpredictable, but many companies will continue to generate cash flows and pay them out in the form of dividends.

Those payouts enable investment trusts like AEI to build a portfolio that can offer a dividend yield well in excess of the rates currently available on a cash account, with the potential for capital growth over time. 

Investment objective
To provide shareholders with an above average income from their equity investment while also providing real growth in capital and income.

Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. The company is authorised and regulated by the Financial Conduct Authority in the UK.

Find out more at www.aberdeeninvestments.com/aei or by registering for updates. You can also follow us on LinkedIn, Facebook, YouTube and X.