Mini budget

The current economic climate is at the forefront of every media channel at the moment.This report provides you with some valuable insights to the granular position we find ourselves in.

The Mini Budget & Pensions

Whilst billed as a “Mini-Budget”, Kwasi Kwarteng’s first Budget contained some significant announcements. From a pension (and SSAS) perspective, these are our thoughts: 

  • The reduction in basic rate income tax from 20% to 19% in April 2023 will reduce tax relief on personal contributions for basic rate taxpayers by 1%. 
  • However, these income tax reductions will also reduce tax on benefit withdrawals from a pension scheme. Large withdrawals such as taxable lump sum death benefits, that may trigger the additional rate of tax, may be best postponed until the next tax year if possible.
  • By scrapping the planned increase in Corporation Tax in April 2023, tax relief on company pension contributions will be maintained at 19%.
  • The reversal of the 1.25% National Insurance increase from November 2022 has little impact on pensioners as pensions are not subject to National Insurance.
  • IR35 legislation that requires firms to assess whether contractors should be taxed as employees is being repealed from April 2023. This may increase the number of self-employed contractors and thereby the demand for private pension savings.
  • The ‘Investment Zone’ proposals with cuts to stamp duty and business rates for commercial property investment appear to only be available for businesses rather than pension schemes. However, this could stimulate demand for SSAS loans to client companies to help fund commercial property purchases.
  • Whilst not relevant to SSASs, it is worth mentioning that the 0.75% charge cap for auto-enrolment pension schemes will now exclude performance fees for illiquid investments such as infrastructure finance in an effort to boost investment in these projects by large pension funds.

Investement Market


For investment markets, 2022 has and continues to be an especially volatile year. You may recall, we came into this year with many major stock markets at all-time highs, with the US S&P 500 peaking at 4,796.56 points on 3rd January 2022. Bond yields also came into the year at historic lows, following years of ultra-low interest rates and quantitative easing.


 

While inflation was ticking higher throughout 2021, markets had initially been reassured by the narrative this would be transitory. Unfortunately, inflation has proved far more stubborn than initially believed with the war in Ukraine only exacerbating matters. This has resulted in the raising of interest rates by central banks, prompting weakness in both stocks and bonds and leaving limited places for investors to hide.

One of the few places to find positive returns this year has been in energy and commodities. The windfall profits for energy producers, alongside a substantial fall in the pound pushing up the value of overseas earnings, has helped the FTSE 100 be one of the best performing stock indices this year. However, we should point out the narrowness of this performance. Unless one was overweight energy companies, it has been difficult to keep up with the FTSE 100 this year, let alone outperform.

 


 

While it may have been tempting to chase the outperformance of energy companies, we must keep in mind the long-term investment focus. Over the longer-term energy has underperformed the wider equity market and much of the gains of the past year have only resulted in the sector catching up. This, in part, gets to the crux of the issue we have seen this year. Many of the worst hit assets have been those which have performed so strongly over the last decade or so – US technology and growth stocks in particular.

We would also highlight that volatility is the price investors pay for seeking higher returns than those available on exclusively low risk investments. While predicting exactly when we are likely to experience volatility can be difficult, there can be no doubt that it will be experienced at some point in any long-term investment. However, history has demonstrated the rewards of sitting tight through periods of volatility; the chart below outlining long-term stock market returns, despite substantial periods of market weakness, is reassuring at times such as these.

 


 

Looking forward, we expect markets to continue to be volatile until the future path for inflation and interest rises becomes clearer. We would, however, highlight that this picture could change as quickly as it has developed. We have seen some early signs that inflation may have peaked, with oil now some way off its high and retailers indicating they are likely to begin cutting prices to clear overstocked inventories and to continue to draw in increasingly stretched consumers.
 
We are also starting to see medium-to-long-term investment opportunities arising, with many high quality, well capitalised business in structural growth sectors trading at a considerable discount to last year. Similarly, value opportunities are cropping up in the bond market for the first time in many years – in reality, since before the financial crisis. One can now receive a gross annual yield of close to 5% on a UK government bond maturing in January 2025, something which would have been unthinkable only a matter of months ago.
 
It has clearly been a challenging 2022 thus far, however we believe it is in your best interests to retain holdings. When the markets are as volatile as they have been at present, it is rarely beneficial to make drastic changes.

 

As a valued client of Imperial Chartered, your funds are monitored daily by our experienced Investment Committee. We ensure they are assessed against the whole of the market and adjusted accordingly, to make sure you are receiving the highest returns & lowest levels of volatility for your tailored risk appetite.

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