Prime Minister Liz Truss didn’t survive the Daily Star lettuce, but the lasting legacy of her brief tenure has shredded the outlook for our personal finances.
If you haven’t seen the viral ‘Liz vs Lettuce’ video stream, it was tabloid questioning which would expire first – the Prime Minister’s term or a Tesco 60p lettuce with glued eyes, teeth and a blonde wig . Disco lights were added after his resignation on Thursday.
After a week of taxes, pensions and energy policy being thrown into the political salad spinner, what could the next phase of this economic experiment mean for our money?
Whoever succeeds him next week, the answer will be higher taxes.
Chancellor Jeremy Hunt needs to find £40bn in savings. The extraordinary series of tax reversals he announced on Monday – many of them Labor policies – will only get him part of the way.
Promising ‘nothing is ruled out’, he is so keen to ensure that the mid-term budget plan for Halloween does not contain any scary surprises for the market that some experts expect half of the savings needed to come from hikes. of taxes.
His dismantling of Trussonomics ended plans for a basic tax rate of 19p, lower corporation tax and lower taxes on dividends.
Extending the “stealth tax” of frozen income tax thresholds seems like a no-brainer. While Truss proudly ‘delivered’ the scrapping of the National Insurance increase, Nimesh Shah, chief executive of Blick Rothenberg, believes there could be a turnaround by restoring the 3.25% rate for taxpayers at a higher and additional rate next April.
“It was too late to stop it this time, but someone making £160,000 will be even better off by around £1,100 next year because of this knockdown from Nics,” he says. “If they want to support vulnerable people, they need to find ways to pay for it.”
Either way, dividend tax rates will increase another 1.25 percentage points next April. This, coupled with increases in corporate taxes, is a blow to directors of limited companies who pay themselves in splits – a group largely excluded from pandemic support.
It’s also bad news for investors who hold stocks outside the popular tax packages. Income investors have seen UK bank share prices plunge this week amid rumors of a ‘windfall tax’ on profits – although Hunt has held off on reinstating the cap on bankers’ bonuses.
Bankers shouldn’t get too excited — there’s always the possibility of another U-turn by October 31!
Pensioners aren’t banking on Truss’ dying promise this week to honor the triple lockdown as inflation topped double digits. It will cost around £9.5billion to fund, pushing the state’s full pension above £10,000 from next April (assuming no reversal occurs).
While retirees are a group of voters the Conservatives cannot afford to antagonize, there have been no such promises to increase benefits. With food price inflation reaching 15%, this goes against ministers’ repeated promises to “protect the most vulnerable” in the face of soaring prices.
Plans to unfreeze the energy price guarantee next April were the right thing to do – I have long argued that this costly support should never have been extended to the wealthy. However, it is not just benefit claimants who are suffering.
The combination of £4,000 energy bills and higher rent or mortgage payments could leave the finances of millions of full-time workers in a very vulnerable position, but we don’t yet know where the Treasury threshold will fall.
The tax savings lost from Hunt’s series of U-turns are pretty meaningless for the most part; it’s the spike in mortgage rates that really kicks people off financially.
If you work in an office, it should now be obvious who the winners and losers are among your colleagues – mortgage solutions are all that everyone wants to talk about.
Those in fixed rate deals will now struggle to do much better than 6% on a new five-year solution. On a £250,000 mortgage, the ‘payment shock’ could be £500-600 a month, and almost 2 million fixes will end next year.
By the next election, we could have a real estate crash and negative equity to contend with. Falling prices will affect loan-to-value ratios, making it even more expensive for people in debt to remortgage.
At least on Monday, the Trussonomics kill sent UK gilt yields (and swap rates used to set mortgage rates) back in the right direction. Mortgage brokers expect rates to come down slightly in the coming weeks if gilt rates hold steady, but the days of cheap home loans are over.
Financial markets have remained stable following the Prime Minister’s resignation – so here’s something to check while we wait for the next leader to emerge.
Movements in gilts also pose a silent threat to people on defined-contribution pension plans.
Defined-benefit (end-of-career salary) pension plans have grabbed the headlines for their risky derivative-related hedging, but in reality there is little danger of well-funded plans failing to pay their retirees.
However, anyone on DC work schemes would be wise to check their exposure to gilts and possibly add a few years to their expected retirement age.
“Let’s say that on the first day of his new job, an ambitious 25-year-old estimates his retirement age to be 50 or 55 on his company pension form,” says David Hearne, Certified Financial Planner at FPP. “That means they could be in danger of being ‘lifestyle’ from the age of 40.”
The lifestyle – the gradual shift from stocks to gilts and cash as retirement neared – is a legacy of the days when all savers had to buy an annuity. Gilts were considered a safe haven, but in addition to missing out on potential stock returns, you also risk the risk of capital losses.
Another thing to watch out for is cash. With so much uncertainty ahead, everyone needs an emergency fund. However, the accepted criterion of saving three to six months of living expenses must also be adjusted for inflation – with hard times ahead, you might need more money than you think.
The good news is that many new savings offerings are springing up ahead of November’s scheduled rate hike – and I expect more to follow.
Barclays customers with up to £5,000 to shelter can get 5% interest on its new Rainy Day Saver (you must join its Blue Rewards scheme, which is cost-neutral provided that your account has two direct debits).
Nat West, Lloyds and Yorkshire Bank are all offering 5% on their monthly regular savers (equivalent to 3.2% spread over the year).
That’s less than inflation, but it could be a better rate than your mortgage.
If you plan to pay a lump sum before the end of your fixed rate contract, this could be a way to get interest rate arbitrage before our outgoing PM turns into a pumpkin.
Claer Barrett is the FT’s consumer editor: email@example.com; Twitter @Claerb; instagram @Claerb
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