Celebrating our 25^th anniversary

This November will see us celebrate a special milestone as it is exactly 25 years since Phillip Bates & Co Financial Services opened for business.

Many of our clients have been with us for much or all that time while, for others, we have started acting for you in more recent years.

Because we are talking about a generation, we now have many cases where we continue to advise mum and dad but are also now responsible for the financial planning of their children too.

We are hugely appreciative of the support our clients have given us over the years and the loyalty you continue to show us.

We are also indebted to the contribution of our team which has also grown over the years to meet the requirements of our clients.

It is hard to believe that it is 25 years since the Bill Clinton/Monica Lewinsky scandal, while 1998 was also the year France won the men’s football World Cup and Titanic became the first movie to gross a billion US dollars at the box office.

As for Phillip Bates & Co Financial Services, we, like our sector in general, have changed during those 25 years from being primarily a product distributor to a service-led business in which building long-term, trusted relationships is of key importance.

Many of you who have been with us since the start will know all about the peaks and troughs of the global economy and will be used to us advising you that your financial planning is about the long-term and not being overly influenced by short-term bumps in the road.

We will be in touch shortly with further news regarding our plans to mark our 25^th anniversary.

A more positive economic outlook

The need to stick to the long-term plan has never been more apparent than during the last couple of years of economic upheaval at home and abroad.

It is therefore heartening to see some small green shoots of recovery with the most recent economic data revealing that the inflation rate has eased back to 6.8% from last October’s 11.1%.

While Chancellor Jeremy Hunt suggested there may be an inflationary ‘blip’ in September’s data, he told the BBC that “The plan is working, inflation is coming down.” 

To meet the Government’s pledge to halve inflation, the rate will need to reduce to around 5.3% by the end of the year. The Bank of England has indicated that 5% is possible.

There is also a growing consensus that interest rates are nearing their peak with the Bank of England expected to announce a 15^th consecutive and perhaps final increase to 5.5% at its September meeting.

While it is encouraging that the UK economy is showing greater stability, we must remember that what happens here is only one piece of the jigsaw. We also need to track closely what is happening elsewhere in the world, including the US which is also showing signs of recovery and China which is in the midst of an economic slowdown.

Just as 25 years ago, the importance of having a long-term, diversified financial plan cannot be overstated.

Recent stories in the press have raised concerns about pension planning or, rather, the lack of it.

The Institute for Fiscal Studies has launched a wide-ranging review of the pension system, looking at whether people are saving enough and if more support is needed for people to use their funds appropriately.

The Pensions Review is a multi-year project that will analyse the consequences of current pension policy, the economic environment and individual behaviour for living standards in retirement. 

One of the biggest questions surrounds the effectiveness of auto enrolment which brought millions into workplace pensions, but at much lower rates of saving than required.

There is also the issue of the increasing number of self-employed people who are failing to save into a pension or not at a sufficient level to prepare them for their future retirement. 

A stark example came this week with the news that over 50,000 people have left the NHS Pension Scheme this tax year due to affordability.

The rule of thumb often referred to in the financial services world is that you should halve your age to determine the percentage you should be adding to your pension pot each year, so if you start saving at 25 then it should be 12.5%, rising to 20% if you are 40.

It is intended to be a simple device to illustrate the importance of starting to contribute funds into your pension scheme as early as you can.

Of course, as we regularly remind our clients, no two people’s retirement goals are the same. That is why we create bespoke plans for clients intended to meet their specific objectives in their later years.

What we do see in many cases is an underestimation of the size of pot that will be needed to meet the desired quality of retirement. This is partly due to the need to factor in inflation and the fact that life expectancy is generally much greater than it used to be.

Lifetime Allowances

The decision by Chancellor Jeremy Hunt to abolish the lifetime allowance on pension pots continues to reverberate.

Our team is working closely with a number of clients, using our specialist knowledge and tools to model the implications of the changes and to enable them to avoid any future traps.

This is a complex area, supporting clients with any requirements to take immediate action, but also with one eye on the possibility that a future government may look to reinstate some form of lifetime allowance.

Inflation proving sticky

The latest UK inflation figures showed a smaller than expected fall to 10.1% in the year to March compared to 10.4% in February.

Experts had hoped that the rate might have fallen back to single digits, but continuing soaring food prices meant that this was not the case.

This will be linked to the effect of high energy costs, which are starting to come down but not in a way that is yet to have a significant impact on the inflationary rate.

There is now also a view among many commentators that the Bank of England will inevitably react by increasing interest rates when its Monetary Policy Committee next meets on May 11^th.

While we will keep an eye on the MPC’s decision and any short-term implications, the planning we undertake on behalf of clients is much more about the medium to long term, recognising that there will be ups and downs in the economic picture, and putting in place robust and diversified plans that deliver the retirement goals our clients are seeking.

We hope your 2023 has got off to a good start. 

The early data suggests that the economic situation continues to look brighter than it did for much of last year.

The UK inflation rate eased in December from 10.7% to 10.5% with lower prices for petrol and clothing pushing down the headline rate.

While most experts expect that inflation will continue to fall to a level nearer 5% by the end of 2023, the immediate continued upward pressure means that the financial markets anticipate the Bank of England raising its main interest rate to 4% later this week.

There was also some positive news coming out of the United States where the country’s economy expanded by 2.9% from October to December, ending 2022 with momentum despite the pressure of high interest rates and the ongoing expectation of a recession.

The financial markets have similarly been kinder of late, although you would typically expect to see a bounce back in this area ahead of any sustained economic recovery.

In terms of the UK economy, the next important date in the diary is Chancellor Jeremy Hunt’s Budget which will take place on March 15 and will be accompanied by a forecast from the Office for Budget Responsibility.

The expectation is that Hunt will deliver a slimmed down Budget after the drama leading up to November’s Autumn Statement and the ensuing tax rises and spending cuts in a bid for stability and reassurance. 

The economic climate, while showing some small signs of moving in the right direction, provides the Chancellor with few if any opportunities to pull rabbits out of the hat. 

The Government will instead be hoping to buy itself more time to demonstrate a sustained economic recovery before it hopes to be able to offer some tax giveaways in the 2024 Budget which is likely to come in the final stages of the run-up to the next General Election.

In terms of immediate client opportunities as we head towards the end of the financial year, please do consider pension contributions and ISA allowances and any capital gains that can be realised before the tax allowance is cut from the current level of £12,300 to £6,000 in April 2023 and £3,000 from April 2024.

As ever, please do get in touch with the team at Phillip Bates & Co Financial Services if you would like to speak to us about these or any other matters. Similarly, as many clients know, we are always happy to arrange meetings with any family members or friends who would like to take some financial guidance.

Like all smart politicians, Chancellor Jeremy Hunt talked up the need for Britons to “face into the storm” ahead of presenting his Autumn Statement.

But while some sections of society will have to play their part by paying more in taxes, the statement was nowhere near as painful as some commentators had been forecasting it might be.

A lot of the tougher decisions were delayed with scheduled public spending being maintained until 2025 and increases for the NHS and schools. Defence spending is maintained at 2% of national income.

State pension payments and means-tested and disability benefits will increase by 10.1% in line with inflation. The much talked about pensions “triple lock” is therefore protected.

There was, of course, some pain meted out with the tax-free allowance for dividends being reduced from £2,000 to £1,000 next year and £500 the year after. This is a body blow to business owners working hard to weather the current challenging conditions and will raise the question as to whether dividends rather than salary remains the most tax-efficient route.

Capital gains tax allowance will be cut from the current level of £12,300 to £6,000 next year and £3,000 from April 2024.

As you would expect, we will be working closely with clients who are impacted by the above reductions. In the case of CGT, it will be important to use allowances this year if appropriate and, going forward, we will consider alternative measures that will assist with tax planning.

While, the coming winter will undoubtedly be tough for many, particularly those living on a tight budget, the approach taken by the Chancellor in his statement will, one hopes, ensure that any recession is shorter-lived than had perhaps been previously forecast.

The Office for Budget Responsibility (OBR) said the UK economy would shrink by 2% over the totality of a recession, which started earlier this year and is expected to last just over 12 months.

Both inflation and interest rates look like they may be topping out before the end of this year.

There was a generally benign reaction from the markets to the Chancellor’s 53-minute statement, providing further evidence that they are reassured by the steady and sensible approach now in place, compared to the chaotic few weeks of early Autumn.

What is less clear is the longer-term plan for growth outside of a couple of eye-catching announcements around infrastructure and the go-ahead for the Sizewell C nuclear power station.

Depending on how the next couple of years go, this may not be the concern of a Conservative government with a General Election having to be held by January 2025 at the latest.

For our clients, the reaction to the Chancellor’s Autumn Statement should provide reassurance, but it is important to remember that investments are not focussed solely on the UK, but across the world.

The Government may not have called Friday’s ‘fiscal event’ a Budget, but it certainly packed more of a punch than many Budgets put together.

In just over 25 minutes on his feet, new Chancellor Kwasi Kwarteng took the biggest economic and political gamble in 50 years – the last time there was a tax cutting event of a similar scale.

The key measures announced were:

• The scrapping of the 45% top rate of income tax for those earning more than £150,000.
• A 1p in the pound cut to the basic rate of income tax brought forward to 2023.
• A 1.25% increase in National Insurance contributions will be cancelled from November.
• The stamp duty threshold rises from £125,000 to £250,000 and for first time buyers the threshold rises to £425,000.
• The rise in corporation tax from 19% to 25% next April has been scrapped.
• Annual investment allowance, the amount companies can invest tax free, remains at £1m indefinitely.
• The cap of bankers’ bonuses has been scrapped.
• Investment zones in 38 local areas under discussion.
• Tax cuts and liberalised planning rules to be offered to release land for housing and commercial use.

The slew of tax-cutting and tax cancelling measures outlined by the Chancellor follows the announcement a few days earlier of the energy package for consumers and businesses which could end up costing the taxpayer in the region of £150billion.

While some of the Chancellor’s actions, such as those on infrastructure and housing, make sense, there is a lot that has left many people at best baffled and at worst seriously troubled. Measures such as reducing the 45% top rate of tax and the removal of the bankers’ bonus cap do not seem to be those of a responsible government with a steady hand on the tiller.

The consequence of Friday’s ‘fiscal event’ is that interest rates will continue to be hiked up beyond the 0.5% rise announced by the Bank of England on Thursday. 

It is likely that a further rise of 0.5-0.75% can be expected over the coming months. For many households the resulting increased mortgage payments will take away any gains from other measures contained in the Chancellor’s statement.

Only time will tell whether the decision to embark on a tax-cutting spree has worked. With the next General Election two years away at most, it does feel like new Prime Minister Liz Truss and her Cabinet have decided that a bold gamble of such a scale gives them the best shot at re-election. 

Should the gamble fail, and Labour wins the next election, the party’s leader Keir Starmer has already started to make clear that many of the measures would be overturned.

The initial reaction of the markets to the Chancellor’s statement was not favourable with sterling falling to its lowest level against the US dollar in 37 years. Bonds and equities also fell sharply.

Interviews over the weekend suggest that Liz Truss and Kwasi Kwarteng remain emboldened and plan to continue pursuing an aggressive tax-cutting agenda over the coming months.

The great concern, though, is that the UK is now set on an irreversible path of ‘boom and bust’.

We must all hope that this proves not to be the case, but what the events of the last few days do demonstrate is the importance of our clients having sensible, balanced, long-term financial plans with a global rather than UK-centric approach.