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Budget 2020: At a glance

What the coronavirus Budget means for your investments

13 March 2020

7 minute read

In a turbulent week for health and wealth – we give you the lowdown on how the interest rate cut and Budget could affect your savings and investments.

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek professional independent advice.

What you’ll learn:

  • How the interest rate cut could affect your finances
  • The extra appeal of investing long term for children
  • What actions to consider before the end of this tax year.

A week is a long time in politics, they say. With the spread of the coronavirus and turbulent stock markets, the last few days has felt more like a month of Sundays.

Some of the markets, for instance in oil, government bond and share prices, have looked mad as a March hare.

Nerves have been jangling over the coronavirus threat. So much so this sparked a sharp drop in the FTSE 100 index of leading shares on Monday – the steepest fall since we were in the grip of the financial crisis in 2008.

The outgoing Bank of England Governor Mark Carney and the Chancellor of the Exchequer Rishi Sunak responded by unveiling a two-pronged attack to help inoculate both the economy and the finances of families.

First came a 0.5 percentage cut to the Bank of England base rate on Wednesday morning – bringing it down from 0.75% to equal its historic low of 0.25%. This will reduce the cost of borrowing for many mortgage borrowers. Most borrowers with tracker mortgages should see their repayments drop in line with the base rate cut – though a few may find they have a deal where the reduction is less than the base rate cut or a floor is applied to how low their loan rate can go. Homeowners paying a lender’s standard variable rate may see their repayments come down – but it is up to individual lenders as to when or even whether they will pass on the cut. Those with fixed rate home loans will continue to pay the same until their deal ends. However, borrowers might see the cost of new fixed rate mortgages falling to reflect the cheaper cost of borrowing.

Then came a Budget packed with measures designed to keep both businesses and families afloat through the worst of the virus crisis, including allowing sick pay to be claimed from the first day even if you are only in self-isolation showing no symptoms.

The focus on the coronavirus emergency meant more conventional tax giveaways were few and far between.

You should bear in mind that tax rules can change in future and their effects on you will depend on your individual circumstances.

Tax rates: there are no changes to income tax rates – and the personal allowance and the higher rate threshold remain at £12,500 and £50,000 respectively.

But a rise in the lower National Insurance threshold from £8,632 to £9,500 from April, confirmed previously, means the average worker will be better off to the tune of £100 a year. On top of the freezing of duty on booze and fuel – and the removal of VAT on digital books (from December) and women’s sanitary products (from January next year) this should all add up to many householders feeling a little better off.

Pension tax relief: – The lifetime allowance will rise by inflation from £1,055,000 to £1,073,100. It’s an important figure to be aware of as you usually pay tax if your pension pots are worth more than that amount. And those who shortly hope to convert a pension pot in to an annuity – an income for life – are likely to see the rates they can lock into dip in the wake of the interest rate decision.

There are changes to help high earners. From next month they will receive a more generous tax break on their pension contributions. Against a background of addressing pension issues for senior NHS staff, the Chancellor announced an increase in the threshold income and adjusted income for the purpose of calculating the tapered annual allowance. This means high earners with a threshold income of below £200,000 or adjusted income – essentially all income plus pension contributions paid by your employer - below £240,000 will no longer be affected by the tapered annual allowance. For individuals on incomes affected by the tapered annual allowance, the minimum tapered annual allowance will be whittled down to £4,000 from £10,000.

For other pension savers, the tax relief on contributions and annual allowances were left alone. This means you can fill your pension pot by up to a maximum of £40,000 – or 100 per cent of your taxable salary, if it is less than £40,000 - by the end of the tax year. This includes any government top-up you are entitled to based on the level of income tax you pay. If you have already started to draw an income from a pension drawdown scheme but want to start topping up a pension again, you can only contribute up to £4,000 a year. This is called the Money Purchase Annual Allowance.

Capital gains tax: There will be a modest rise in the Capital Gains Tax threshold from £12,000 to £12,300, allowing you to keep more of your profits from the sale of shares or other investments that have risen in value.

Tax-friendly saving: Perhaps the biggest Budget winners are families helping their children to save for the future. The allowance for salting away money in a tax-friendly Junior Individual Savings Account (JISA) or Child Trust Fund will be supercharged from £4,368 to £9,000 from the new tax year on 6 April, while the adult ISA allowance remains at £20,000.

This means that in the next tax year a family of four could in principle shelter £58,000 from the taxman.

The big appeal of saving for youngsters is that they have serious time on their side – making a stock market investment a potentially more attractive proposition than cash.

Youngsters cannot access their Jisa accounts until they are 18 and so the money invested can be left to ride the ups and downs of the stock market over the years. They can also reap the benefits of compounding. This is where interest on savings or bonds, or dividends from shares, are added to the original sum every year, providing an extra boost from the annual returns earned over the decades.

Investing in uncertain times: Investors are understandably nervous about the days and weeks ahead.

With the end of the tax year looming on 5 April you might be wondering whether to risk the stock market right now – especially if you were planning to invest the full £20,000 ISA allowance.

Choosing a cash ISA is one option. But with the base rate cut to 0.25%, savers are being squeezed till the pips squeak. Few deposit accounts pay interest that beats inflation – currently 1.8 per cent – so you are losing money in real terms by sticking to a cash strategy.

It can make sense to consider investments instead as part of an inflation-beating action plan

Stock markets have in the past shown that they have outperformed cash over the long term. But this is never guaranteed as share values rise and fall – and some companies go bust. In any event the past perfornmance of investments is not a reliable indicator of their future performance. You could lose some or even all of your investment. But if you are prepared to invest for at least five years you have a greater chance of beating inflation than keeping your money in a deposit account.

Investors who are worried that another stock market fall will wipe out chunks of their savings might want to consider a two-step approach. You could think about putting cash into an investment ISA before the April deadline to secure this year’s annual allowance – and then wait for the moment when you feel comfortable about investing. Though bear in mind there could be fees involved in holding your cash in an investment ISA. Alternatively, you could open a cash ISA, earn interest tax-free while you wait, and transfer the pot to an investment ISA when you feel ready to invest.

Remember you don’t need to commit a large sum into the stock market all at once. Think about setting up monthly contributions instead. There are usually fees and charges each time your make a regular purchase that might make this an expensive option – but this method takes the worry out of timing the market.

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