‘Handcuffed’ economy offers investors meager rewards without tax cuts
As a naturally thrifty person, I find it disturbing that our country’s finances are handled by a man who is happy to spend Â£ 95 on a pair of plastic slides.
The Chancellor’s choice of shoes as he was pictured budgeting was at odds with his broader message of fiscal prudence. It made her look out of touch as millions of families struggle to balance household budgets.
Despite Rishi Sunak’s claims that his “mission” was to cut taxes for the remainder of this Parliament, investors may fear that the multitude of spending announcements in the budget will turn out to be more of a flop than a blow. whip for the UK economy.
But let’s start with the good news. We can breathe a sigh of relief that the Chancellor has resisted the temptation to tinker with our two most precious tax envelopes, pensions and Isas. Take advantage of these tax breaks while you can.
However, filling them in is the easy part. How might the economic outlook affect the investments you hold in them? UK investors are renowned for their national preference, so the obvious starting point is the broader outlook for UK equities. The FTSE 100 index hit a 20-month high this week, providing a bullish backdrop for spending pledges pledging to level the ânew economyâ. However, its international components are better placed to overcome the challenges now facing the national actions of the FTSE 250.
Giving the UK a pay rise is a budget day headline that businesses – and their customers – are going to have to pay. Despite all the applause over plans to remove alcohol taxes, pub groups are warning that the wage increases could add 30 pence to the price of a pint.
The new economy is bringing new pressures on UK businesses: labor shortages, wage inflation, as well as rising energy, fuel and input costs. Corporate rate relief and value-added tax cuts are expected to decline as employers’ national insurance contributions increase next year and corporate tax increases in 2023. At the In the future, investors fear that UK ‘handcuffed’ companies will hold back growth.
Simon Edelsten, manager of the Artemis Global Select fund, currently assigned the lowest weighting to UK equities in a decade. âDespite the low valuations, it’s hard to find reasonably priced growth stocks,â he says. “The UK is more prone to inflationary pressures than, say, the US and some Asian economies such as Japan could actually be helped by a little inflation.”
If you subscribe to the Chancellor’s optimism, the escalating discounts on UK-focused investment funds may appeal. Sunak’s first budget in March 2020 came as the stock markets plunged into a pandemic nadir. However, investors who bought into the UK at the time may wish they had thrown more powder into the US markets instead. Over the next 18 months, the FTSE All-Share index rebounded 36%, but the S&P 500 jumped almost 57% in sterling terms, and the FTSE All-World index was only marginally behind at 51%.
Either way, investors in stocks did better than those who switched to supposedly safer bonds. The global asset buying frenzy that governments embarked on following the pandemic has killed one of the traditional ‘golden rules’ of portfolio allocation – the 60:40 split between stocks and bonds. There is nothing safe in holding bonds yielding just over 1% if UK inflation hits 5%, as the Bank of England is now predicting.
Most private investors conclude that there is no longer any point in holding bonds. To generate growth, investors will have to take a higher level of risk.
Higher exposure to equities is something that younger investors may feel more comfortable with; For older investors sitting on a lifetime of investment gains, the risk of a stock market crash when stimulus is withdrawn is more troubling.
Cash offers no protection against inflationary pressures, but could prove to be a cheaper buffer for your portfolio. Indeed, management fees on bond funds could wipe out the meager level of return.
Finally, know that wage inflation combined with frozen thresholds will put more of us in higher rate tax brackets. Parents earning more than Â£ 50,000 are starting to see their child benefit decrease – a threshold that has not changed since 2013. Since 2010, those earning more than Â£ 100,000 have seen their personal allowance decrease, resulting in a drop in child benefit. marginal tax of 60%. If these allowances had changed in line with inflation, they would now be Â£ 58,600 and Â£ 131,000 respectively.
Both groups could recoup some of the gains by using wage sacrifice deals to invest more in their pensions – although they risk falling into another tax trap. Suppose your pension fund reaches Â£ 500,000 at age 50. Even if you stop paying altogether, a 5% annual growth would still put you on track to reach the frozen Â£ 1million lifetime allowance at 65.
While waiting for his promises of tax cuts to materialize, for the Chancellor’s flip-flops to remind him not to take his claims of caution too seriously.
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