When Kwasi Kwarteng revealed the UK’s mini-budget back in October 2022, there was a massive dip in the value of pensions throughout the UK, which led to near enough a full-scale liquidation event. In fact, BT pensions alone had their values plummet a staggering £11billion after the mini-budget was announced.
The Publishing of the BT Pension Scheme Report
Every year, the company BT publishes a report on its pension scheme. This is one of the largest schemes in the country, as it has almost 270,000 members on it. The publishing of this report, given the size of the scheme, provides valuable insight into just how much of an effect the mini-budget had and how it has impacted funds. Following a large rise in interest rates, pension schemes have found themselves under a severe amount of strain.
The bank of England had to intervene five days after the mini-budget was announced. To do this, they promised to buy up to £65billion of government debt in order to further steady the situation. If they didn’t do this, many pensions throughout the UK would have been left with negative assets.
How Much Money Was Lost?
Looking at the BT Pension Scheme Report alone, it can be seen that as of June 2022, the value of assets dropped from £57billion to £47billion. This is already a large loss, but following the mini-budget’s release, in the last weeks of September leading up to October, that value plummeted even further by another quarter.
This is addressed within the report, which states, “following the year-end, there was a significant fall in the value of the scheme’s assets during a period of significant market volatility in the second half of September.” These comments continued later in the report, where the intervention of the bank of England was addressed. It said, “prior to the Bank of England’s gilt-market intervention, there was an estimated £11billion fall in the value of the scheme’s assets.”
What Pension Changes Do You Need to Know About?
Following the release of the mini-budget and the clear impact that it has had on pensions, there are a number of potential changes that people with pensions need to keep an eye out for. Behind all of the headline figures and jargon, some of the key changes that you need to be aware of include the following:
- Less Income Tax = Less in Your Pension
As of April 2023, there are going to be changes made to income tax. Sure, this will have a positive effect on the amount of money you can take home, but there will also be negative ramifications when you consider pension saving. The cut is of 1% as anyone who makes between £12,571 and £50,270 a year will have their income tax lessened to 19% from 20%.
HMRC have confirmed that these changes in income tax are going to mean that people around the country will see a real-world benefit to their income. People in the higher rate tax band are also going to see a difference as their income will increase by about £360.
The way that this increase has an impact on pensions is that the bonus that pension savers normally receive from HMRC is going to be added to the marginal rate of tax. As such, when the rate of income tax decreases, the amount of tax relief that is allowed for pensions is going to fall at an equal rate.
- Lower Contributions to Pensions Could Mean a Smaller Retirement Pot
As mentioned above, there will be changes to income tax made, which means that overall pension contributions could dip. One of the major impacts that will be seen as a result of this dip is that there will be smaller pension pots and, subsequently, less retirement income over time. The reason for this is the power that compound interest has, which is where long-term and small investments rack up over time and build a large amount of growth in the process.
- ISAs are Looking Like a More Attractive Option
The tax relief that people get on pensions means that they are an excellent way for people to invest and save money in the long term. That being said, because of the reasons explained above, this prospect is less attractive than it used to be. ISAs are also an effective way to save and invest money over time, and as such, these might be a much more attractive option for people. Not to mention, if you decide to take money out of your ISA, then doing so is tax-free. There are a few different types of ISA available, and it is worth exploring the different options available to you if you are interested in using one.
- An Income Boost in Dividends
If you are a self-employed company director and you mainly pay yourself using dividends, or if you are an investor who invests in organisations that pay companies out of their pension or ISA, then there is going to be a boost received as a result of the tax cuts announced within the mini-budget. The highest rate of tax on dividends is going to be cut from 39.35% to 32.5% as of April 2023. This tax cut is going to be a good opportunity for the self-employed. Especially since, generally speaking, they have less money saved in their pension.
Do You Need Help with Your Finances?
We seem to be in a period of economic uncertainty at the moment, with the UK government haphazardly throwing out budgets and interventions needed from the bank of England to keep things stable. If you need more information on your finances and how you should be moving forward in light of all this, it might be worth enlisting the help of Simple Liquidation. Our team of experts will be able to review your current situation and advise you on what the best thing to do with your money is. If you have any questions or would like any more information, then don’t hesitate to get in touch.