News and Analysis | Author: Rowan Harding | October 20, 2022

Market mayhem: what it means for your finances

The political drama continues, with media headlines dominated by government chaos and economic uncertainty.

Now newly appointed chancellor Jeremy Hunt has unveiled a raft of changes to ex-chancellor Kwasi Kwarteng’s mini-budget, in an effort to rebuild investor confidence and repair the damage to the economy.

What changes has he made, and what does they mean for you and your finances? Here, we outline some of the key announcements around taxes, pensions, savings and investments.  

The new chancellor has reversed almost all of the proposed tax cuts announced by his predecessor, including the proposed cut to income tax – from 20p to 19p. So, the basic rate of income tax will stay at 20% indefinitely.

The Government had already cancelled measures contained in the mini-budget to abolish the 45% additional rate of income tax, paid by people who earn more than £150,000 a year.

There has also been a U-turn on dividend tax cuts, which were scheduled for April 2023.  It means dividend taxation will remain at the current rates of 8.75 per cent, 33.75 per cent and 39.35 per cent for basic, higher and additional rate tax payers, respectively.

The new chancellor has also reversed the government’s pledge to repeal IR35 (off-payroll working) reform. The new rules announced in the mini-budget would have meant that employers were no longer responsible for assessing workers’ employment status, and handling all tax and national insurance contributions for self-employed contractors and agency workers. This plan would have been beneficial to those who are self-employed or freelance, giving them the ability to assess their own tax, and the U-turn has been met with negativity by many. 

The future of the “triple lock” protection for state pensions has been thrown into doubt, after both the new chancellor – and PM Liz Truss – have refused to commit to keeping it. The triple lock promised an increase in the state pension by whatever is highest – earnings growth, consumer price inflation growth, or 2.5 per cent a year. This is bad news for those reliant on the state pension already dealing with the cost-of-living crisis (and Hunt’s announcement of reduced support for energy costs.)

Meanwhile, Hunt’s statement does seem to have calmed the Gilt market. The sudden rise in Gilt yields following the mini-budget had an impact on some defined contribution schemes, and those close to retirement whose pension fund is heavily invested in gilts may have seen their pot reduced in value. Hunt’s proposals have seen gilt values improve, but there are warnings that gilt market volatility could remain high during these times of political turmoil.

When interest rates go up, pension annuity rates usually do as well, and they have now reached a 14-year high. An annuity is one of the products you can buy with your accumulated pension pot, and it gives you a regular guaranteed retirement income for the rest of your life, or for a fixed term. Some investors may be wondering whether now is a good time for an annuity, since the current rates are attractive. Buying an annuity now rather than waiting could mean locking in a higher rate. However, further interest rate rises are expected in the coming months so annuities could be even better value then. As always, we’d recommend chatting with your financial advisor if you’re considering annuity.

Overall, the latest mini-budget U-turn by the Government will hopefully deliver some market confidence and stability. However, the events of the past few weeks have had a considerable impact, and Jeremy Hunt has warned of further “difficult decisions” ahead.

There’s a whirlwind of financial news to get our heads around right now, and political instability is not generally a favourable backdrop for investors. If you’re feeling uncertain and anxious about your savings and investments and would like some expert advice, get in contact with us for a chat today.