Gambling government finances


Have you ever watched the news and thought “oh my word, we’re doomed!”

Yep, me too.

However, as I have said numerous times before (e.g. here and here), I urge you to focus on what you can control and don’t worry about the rest.

Speaking of what you can’t control… Liz Truss.

If she is prepared to be unpopular, she is certainly off to a good start. 🚀

Kwasi Kwarteng may be her political soulmate, but Friday’s (anything but) mini-Budget is quite a gamble, economically and politically, and the headlines did not land well with the general public as the short-term benefits clearly go to higher earners.

The free market ideologues in government are picking a fight with the free market… what could possibly go wrong?!

I’ll be diplomatic and say, thus far, the government is being very, very brave.

The £45billion of tax cuts and £72billion of extra borrowing have frightened the bond and currency markets with Sterling falling and government borrowing costs rising. Don’t forget that capping energy costs is also expected to cost around £60billion (and that is only for six months…)

Scrapping the 45p tax rate may only be £2billion of those tax cuts but it is hugely emblematic, psychologically significant, and probably forms 90% of the bad publicity aimed at the government over the weekend. Scrapping the limit on bankers’ bonuses likely accounted for the other 10%.

So far, the markets don’t think the government knows what it is doing.

Whilst the Bank of England is trying to limit demand by increasing interest rates, the government wants to increase demand by cutting taxes and supporting our energy bills. It reminds me of the Chuckle Brothers: “to me, to you, to me, to you”. Confusing, isn’t it.

So what opportunities arise from the announcements? Tax cuts are good news (in isolation) and there are a limited number of new opportunities, and all the older ones still apply:

  • Firstly, don’t panic. The portfolios we recommend are significantly diversified and invested globally so are mostly denominated in US dollars, Euros, Yen etc. When Sterling falls, the value of these investments rise.
  • Don’t try to time the markets, nobody can do it with any consistency. It’s gambling, not investing.
  • For business owners, paying yourself a basic salary plus dividends and employer pension contributions is still the most tax efficient strategy.
  • If you are a 45p taxpayer, look to maximise your employee pension contributions to benefit from 45% tax relief whilst it exists until the end of this tax year.
  • Conversely, if you are taking benefits out of a pension and incurring 45% tax, postpone what you can until after April 2023 to save tax. This also applies to taxable lump sum death benefits where the deceased was over 75.
  • Similarly for basic rate taxpayers, it’s marginal, but look to maximise your employee pension contributions to benefit from the 20% tax relief before it is cut to 19% in April 2023. And again, if you are taking benefits out of a pension, defer what is possible till April 2023 to save tax.
  • Earnings between £100,000 and £125,140 are still effectively taxed at 60%. Again, look to maximise your pension contributions to benefit from 60% tax relief.
  • Your overall family finances keeping pace with inflation over the medium to long-term is key. In the absence of NS&I Index-Linked Certificates, the optimum investment solution for that has historically been a globally diversified equity portfolio at a level of risk you are comfortable with. If there was a better and / or silver bullet solution to that conundrum I would tell you.
  • Keep shopping around for the best savings accounts, sooner or later banks will be passing on higher returns on cash.
  • If you have a variable rate mortgage, expect rates to rise further and look to overpay if you can.
  • If you have a fixed rate mortgage, it may be economic to pay an exit penalty to secure a new fixed rate deal. Tread carefully though, this is fraught with assumptions on future rates and fixed rate deals are actively being withdrawn from the market. Again, look to overpay if you can.

If you have any concerns about how current events are affecting your financial planning, please contact either Adrian or myself.