Why it’s time to look to the market for retirement savings

The savings landscape is shifting – and last year’s Budget sped things up. Cash is becoming less tax‑efficient and rates have eased, leaving many long‑term savers needing to look beyond cash to support their retirement goals.

The 2025 Budget did not appear to do long-term savers many favours, with various measures designed to reduce the attractions of cash savings.  But it could – as the then chancellor intended – be helping to nudge people towards the stock market and the potentially greater gains available there.

From April 2027, the amount that people aged under 65 can save into a cash ISA each year will be reduced from the full £20,000 allowance to just £12,000. It’s also worth noting that transfers from stocks and shares ISAs to cash ISAs will no longer be permitted although that restriction won’t apply the other way around, i.e. to transfers from a cash ISA to a stocks and shares ISA.

In another change that is already in place, tax payable on any taxable dividend income above your annual dividend allowance rose by 2% from 6 April 2026. That should act as a clarion call for savers to make the best possible use of their annual tax-free ISA allowance as a priority. But the slashing of the cash ISA limit means that if they can maximise the amount of savings they shelter from tax, they will need to use a stocks and shares ISA account for at least part of that £20,000.

The volatility of stocks and shares ISAs may have been a reason why some savers have historically favoured the certainty of cash ISAs. Interest rates on cash ISAs have stabilized to some extent this year, following the bank base rate cuts seen through late 2024 and 2025, but only a handful of top-paying accounts offer more than 4.5%. 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 7,000 in 1999, the FTSE 100 index of the UK’s largest companies did not breach the 8,000 ceiling until May 2024; it is now sitting just below the 11,000 mark, having risen almost 32% since the start of 2025 (to 11 August 2026). Such a strong rally indicates a change of sentiment as investors have returned to a market unloved for over two decades.

Despite this rally, the UK equity market is still inexpensive in comparison with other equity markets around the world, trading at a Price/Earnings ratio of around 15.6x compared with the US equity market at 27x, Japan at 19x and Europe at 18x, as at August 2026.

Although the UK’s headlines have been dominated by domestic economic weakness and political uncertainty, its 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 them 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 5% p.a. at present – above even 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 AEI’s 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. Most recently, performance relative to the benchmark index was consistent in July. Performance benefited from holdings including CMC Markets, whilst also benefiting from not holding AstraZeneca.

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 aims to offer a dividend yield in excess of the rates currently available on any cash account, with the potential for capital growth over time as well. 

Investment objective:

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

Important information
Risk factors you should consider prior to investing: