Darren shares the T&T team thoughts on the latest stock market tantrums and looks at some positive points from today’s UK Budget:
Jeremy Hunt’s long awaited budget was probably just what markets wanted.
You have to admit that team Rishi/ Jeremy played an absolute blinder over the weekend – palming off a distressed UK banking arm to HSBC without any bluster, fuss or (most importantly) tax payer funded bail outs.
Mr Hunt set out his stall today – to entice more mature workers to return to the economy with Pension changes – whilst trying to offer some support to working parents and young families.
The Pension changes are really what interest us as financial planners. We have picked out four main headlines with our own short footnotes for you:
Lifetime Allowance Abolished!
The Lifetime Allowance (LTA) has long been the bane of our clients lives as they try to suitably save for their retirement. Brought in originally by Gordon Brown, it meant that workers had to stop paying into Pensions once they were close to the limit, for fear of triggering punitive tax charges upon access or age 75.
Respective Chancellors have then chipped away at the LTA, bringing it further down to a point where many Pension savers could be caught. Thankfully, someone has pointed out to Mr Hunt that this is actually a daft idea if you want to encourage more mature workers to keep working!
The complete removal of this allowance today was quite a shock – but a very pleasant one!
Annual Allowance Increased:
Another area that limited wealthier and more mature Pension savers, was the Annual Allowance. You used to be able to pay hundreds of thousands per tax year into your Pension if you had the earnings to support it. However, this was again massively reduced by successive Chancellors down to just £40,000 per tax year.
Mr Hunt increased this level to £60,000 today. This will be a big help for those Pension savers who are looking to maximise their Pension contributions in their last few years of working – particularly the self-employed who may be woefully short on Pension saving in their 50’s and 60’s. Coupled with the removal of the LTA, this could have a double impact in positivity for some of our treasured clients.
Money Purchase Pension Allowance Increased:
For many years, the Government has worried about people drawing their Pension and then ‘recycling’ these withdrawals straight back into a Pension to attract further tax relief. They therefore limited the amount that someone who has started taking Pension benefits can put back into a Pension. This figure was reduced from £10,000 per year right down to £4,000 in previous budgets.
Today, Mr Hunt reversed this trend back to £10,000. This is still a long way short of the £60,000 amount you could pay in if you were not drawing Pension benefits – but it will be a help in some cases for clients perhaps wanting to access tax free cash whilst still continuing to work and contribute to other Pension arrangements.
Tax Free Cash gets a Cap:
The one perceived ‘negative’ in today’s budget for Pension savers is the new limit on the amount of tax free cash that you can draw from your Pension. You can currently draw up to 25% of a Personal Pension Plan in tax free cash – up to the lifetime allowance – without paying any income tax.
The current lifetime allowance is £1,073,100, so the maximum you would currently be able to draw would be £268,275.
Because the lifetime allowance has now been removed, the Chancellor wanted to stop Pension savers taking huge amounts from their Pensions without paying tax – hence the cap.
It could be possible that he will increase this allowance annually. If he doesn’t increase it, the 25% tax free cash amount at the very top end starts to erode with inflation. This will be an interesting one to watch.
Many of us wondered if Mr Hunt would remove the 25% tax free cash altogether through this budget, so in honesty, todays limited cap is probably also very good news for the majority of clients. It could force some clients into taking their tax free cash benefits earlier than they planned, if they worry that the cap will not increase in line with their Pension pot.
Enter the Bear with the sore head……
Following on from my starting paragraph, the scene was really skilfully set by team Rishi/ Hunt to sure up markets this week and start to give the UK some confidence again. Everything was looking great, until…..
Global markets begun selling off Banking stocks at an alarming rate.
Ever since Thursday last week, we have been watching US markets very closely as we digested the news that a US bank (SVB) went under.
What on earth caused this to happen?
Having only sent out my Market Commentary about 10 days prior – where I celebrated the strength of Western Bank balance sheets – you would be forgiven for throwing the tomatoes at me! However, stay with me on this.
The SVB situation was both unique to itself and so not at all troubling – but also a red warning light to the whole US economy and so very troubling indeed.
SVB was poorly run. We have spoken to some of your fund managers within your portfolios, and they are telling us that (where they held it) they got out of this stock over a year ago. This Bank was heavily exposed to small Tech start-up businesses with unsteady cash flows. So (on the face of it) this was a ‘one off’ as SVB looked nothing like the bigger multinational Banks that have very diverse client bases and massive levels of cash reserves.
However, SVB underpinned its security through holding US Government Bonds.
This problem is not dissimilar to what happened in UK Pension funds holding UK Government Bonds here in the Autumn. As these usually ‘safe haven’ assets were decimated by interest rate hikes, so the underlying ‘security’ was eroded.
And there you have it.
We are not (in my humble opinion) facing a Banking crisis such as we did in 2008. However, we are facing the hangover of Central Bank obsession with backward looking data and interest rate hikes – whilst they persist with trying to offload Government Debt into already frazzled Bond markets.
You just couldn’t make this up.
This week I heard the method that the Federal Reserve (FED) uses to calculate inflation in ‘shelter’ (housing rental) costs – and it is mind blowing.
Do they perhaps use large software algorithms provided by real estate websites to track rental costs in real time? No, they actually still call up people on the phone in a random sample to see if they are at home during working hours – and check with them to see if their rent has risen.
The data that Central Banks considers is massively outdated by the time they are trying to act upon it. There is also a huge lag between rates being hiked or cut – and the desired effect. Take the great crash of 2008 for example. The FED massively cut interest rates to stimulate markets – but it took over nine months before this medicine really fed through into recovery.
I believe that the same is now happening in reverse. The fall of SVB last week shows that the rate rise hike ‘medicine’ prescribed last summer is now starting to take effect. This is the red flashing light to investors.
So is it time to panic? Should we all pack up and just cash in losses after an already terrible year?
No. In a really weird way, the collapse of SVB – AND the rout on Banking shares this week – gives the FED and Bank of England some serious concerns. Have they ‘overcooked’ their attempts to curb inflation and thus risked a ‘hard landing’ or Global Recession?
I personally think that this is a great point for the FED to pause the interest rate hikes. This allows them some breathing room to try and see how long the ‘tail’ is on the decisions that they took last year.
If the FED and other Central Banks around the world take this approach, we can see a huge opportunity for Bonds and possibly Equities as well. Indeed (and this is the exciting news for more cautious investors) Bond ‘yields’ have been falling considerably this week. When yields go down – Bond values go up.
There is also a noticeable breakaway or ‘negative correlation’ again between what is happening to Bonds and Equities. This is exactly what we wanted to see.
I don’t expect the FED to ‘pivot’ at this stage and start cutting rates again (unless things get really bad). However, there is now a very real chance that they stop hiking. If that happens, I genuinely believe the sore headed bear may amble off into the forest for some years!
I really appreciate that the world seems to be lurching from one crisis to the next. It certainly hasn’t been plain sailing since 2020 and we have had to work harder than ever for our clients. It would be so easy to become disheartened by the constant volatility in markets and doom and gloom news.
I would just want to remind everybody how we experienced a huge market upwards surge only a month ago. Ok, so the market went to early, but the evidence is clear – the markets want to climb. There is so much pent up growth in portfolios right now that it is both frustrating and exciting for us as your financial planners to see.
Hang on in there. We are here for you 100% of the way. Just call or email us if you are at all concerned or need anything explaining at all.
My very best wishes as ever. Darren