Tapered threshold to be raised by £90,000 to £200,000

Rishi Sunak announces the raising of the Taper threshold.

With doctors and the higher earners in mind tapered thresholds are to be raised by £90,000 and removing anyone with income below £200,000. 

Apparently 98% of NHS consultants and 96% of GPs will now escape the taper. 

Minimum annual allowance will be reduced to £4,000, which Sunak says will only impact those with incomes above £300,000. Altogether this constitutes a £2bn commitment by the Government.

There are no other significant changes and the lifetime allowance will increase in line with CPI for 2020-21, rising to £1,073,100.

Changes to entrepreneurs’ relief

Sunak advises that he will not fully abolish entrepreneurs’ relief but he will undertake  a "sensible reform", reducing the lifetime limit from £10m to £1m. 

These reforms will save £6bn over the next five years and the money will go back to businesses through other measures. 

The changes to entrepreneurs’ relief will increase the amount of tax paid by businesses sold at a profit of over £1million. This should see greater opportunity for advisers and accountants to work together to extract value from these businesses prior to sale, for example through increased employer pension provision.

Other News

The Budget announces that the amount families can save into a JISA or CTF will be more than doubled in 2020-21, increasing from £4,368 to £9,000.

Bull markets laid low by coronavirus

Uncertainty over the impact of Covid-19 is giving the markets their worst scare since the financial crisis

Imagine this: the UK has been gripped by a flu pandemic that started in Asia. As many as 60% of workers are at home — some because they have been laid low, but others because going to the office is impossible. Many are gripped with fear. Fifteen million cases have been confirmed in the UK and the death toll stands at more than 290,000. Burials and cremations are delayed. Anxiety is mounting that a second pandemic will hit.

It is exactly what City regulators war-gamed almost 15 years ago as one of their regular exercises to test the resilience of the financial system. The scenario was deliberately made extreme, to stretch participants to their limits. But last week, financial markets demonstrated what actually happens when panic about the impact of a possible pandemic strikes.

Stock markets endured their worst week since the 2008 financial crisis, with the FTSE 100 plunging more than 11% — 823 points — and America’s Dow Jones diving 12%. The broader S&P 500 lost 11.5%, registering its fastest correction since the Great Depression. About $6 trillion (£4.6 trillion) was wiped off the value of global stocks. In the scramble to gauge the medium-term global economic impact of the coronavirus — officially Covid-19 — consensus was building around a $1 trillion hole.

It is a dramatic shift in sentiment from the start of the year, when stock markets were in the 10th year of a bull run that had followed the 2008 crisis, driven by cheap money poured in by central banks via quantitative easing in response to the near-collapse of the financial sector.

US markets — registering record highs only a week ago — are officially in a correction, technically defined as losing more than 10% from their peak. At the start of the year, markets had thought the unusual cases of pneumonia detected in shoppers at a seafood market in the city of Wuhan would be a crisis contained in China, slowing the national economy. It might snag global supply chains and dent growth, but it was seen as an event that would be a short, sharp shock.

The discovery of cases in Italy changed all that. “Although the markets were complacent about the virus, there was an awareness it was getting worse. When it broke in Italy, it was a clear recognition it was a game-changer,” said Charles Hall, head of research at broker Peel Hunt.

While the numbers resemble nothing like that regulatory war game — there were, at the time of going to press, 23 cases in Britain — there is worrying uncertainty about “the depth, breadth and length of this new coronavirus,” said economists at Nomura. “It is simply too early to tell.”

While China has shut down schools, factories and entire cities, such actions have not yet been needed elsewhere. However, events are being cancelled, including this week’s Geneva International Motor Show and Facebook’s annual developer conference in San Francisco. Berlin’s International Hospitality Investment Forum has been delayed. Bookmaker PaddyPower said bets indicated a 60% chance the Tokyo Olympics this summer would be cancelled.

The organisers of Mipim, the property industry’s annual jamboree in Cannes, yesterday postponed the March event until June.

British Airways owner IAG provided a neat summary of the situation on Friday. “We are currently experiencing demand weakness on Asian and European routes and a weakening of business travel across our network resulting from the cancellation of industry events and corporate travel restrictions,” said chief executive Willie Walsh. More ominously, he added: “Given the ongoing uncertainty on the potential impact and duration of Covid-19, it is not possible to give accurate profit guidance for 2020 at this stage.”

“Until a few weeks ago, markets had been expecting positive profit growth from most companies this year,” said Andrew Milligan, head of global strategy at the funds giant Aberdeen Standard Investments. Now they are less sure.

IAG’s shares tumbled by 24% last week and easyJet fell even more, by 27%, after it cancelled flights in and out of Italy, froze pay across the business, offered unpaid leave and halted non-essential training. In the US, Boeing shares were down 16% on the week.

Globetrotters at American bank JP Morgan are facing restrictions on non-essential travel to some destinations, while Nestlé and L’Oréal have suspended business travel until at least mid-March. Amazon has told staff to avoid non-essential travel — including inside the US.

It is not just business travellers being affected. The tour operator Tui suffered the biggest share price fall of the week — 30%. “The markets speculated that consumers would think twice about going abroad on holiday,” said Russ Mould at the investment platform AJ Bell.

Few areas seem untouched. Johnnie Walker maker Diageo has warned of a £200m hit to this year’s profits as duty-free sales drop off in airports and customers in China and Asia stay at home. British American Tobacco said its duty-free sales had also taken a hit.

Supply chains are being thrown into chaos because of the variety and quantity of goods made in China. Big names in the fast-fashion industry — H&M and Zara — have started taking factory space in Turkey to make up for supply stuck in China.

Some mining stocks, often seen as a safe-haven bet during a crisis, have fallen. Even gold — the safest bet of all — declined by more than 3% to $1,586 an ounce on Friday as fear spread.

“The financial markets appear to be pricing in the coronavirus triggering a marked weakening in the global and UK economies,” said Paul Dales at the consultancy Capital Economics.

There is also a debate over whether stock markets were due to draw breath anyway, given their decade of huge gains. Foreign exchange markets, for instance, have been relatively calm amid the turmoil. Silvia Dall’Angelo, senior economist at the US investment manager Federated Hermes, said: “The coronavirus might have just been a catalyst for a correction that was waiting to happen . . . the real economy, in the past few years, has been quite sluggish, while equity markets have been stellar.”

Big investors had been convinced that shares were the place to put their money, given that bonds were offering super-low yields because of the actions of central banks — the Bank of England’s quantitative easing programme alone was worth £435bn. The effect of low interest rates and central bank money gushing into markets has been to push up the prices of gilts and force down yields, sending investors scurrying up the risk curve.

As Hall at Peel Hunt pointed out, there were also other reasons for stocks to have been higher as the year began. The US-China trade war appeared to be cooling, while Boris Johnson’s decisive election victory had removed — at least temporarily — the uncertainty over Brexit.

However, there is a case to be made that equities were overheating. Mould’s view is that the sell-off was “more reflective of how over-exuberant and complacent markets had become, rather than the long-term impact of the virus”.

Investors had been buying into “speculation” and inflated “narratives” rather than fundamentals, Mould added. He quoted Warren Buffett’s warning about the risk of market exuberance, saying: “Be fearful when others are greedy, and greedy when others are fearful.”

Even so, it may not be time to start buying quite yet. All eyes are on the central bankers, whose predecessors saved markets in the post-crisis decade. Jerome Powell, the US Federal Reserve chairman, issued an emergency statement on Friday insisting that the fundamentals of the US economy remained “strong” despite the risk from the coronavirus.

In an apparent attempt to calm the markets, he added: “We will use our tools as appropriate to support the economy.”

The US markets had already been pricing in as many as four interest-rate cuts this year, even before Powell’s statement.

Andrew Bailey, who starts as Bank of England governor in a fortnight, also faces bets that its monetary policy committee (MPC) will cut rates from 0.75%.

Dales at Capital Economics did not rule out a statement before the scheduled MPC meeting on March 26 if the situation were to deteriorate. He said it could outline coordinated central bank action — of the type that took place during the worst of the financial crisis — or even an emergency MPC meeting.

Relying on central banks to keep bailing out markets, though, may not be a long-term solution. “It is a hope in the market that [they] can fix all of this and make it go away — and that’s not the case,” said Melissa Davies, chief economist at the equity research firm Redburn.

She added that “making sure banks aren’t tightening their lending conditions” could be a more effective action for the Bank of England to take.

It was a suggestion echoed by Milligan at Aberdeen Standard Investments. “We don’t want a credit crunch on top of a virus shock,” the fund manager said, adding that trading last week was “vicious” but “relatively orderly”.

Hall insisted that private investors had not been scrambling to take savings out. “We have a very computer-driven equity market nowadays, so these aren’t necessarily human beings making a decision to sell shares because they’ve suddenly got a lot more cautious,” he explained. “It is macro-driven funds taking a view that equities are now riskier than debt . . . This is not mainstream investors panicking.”

The intervention of the Federal Reserve chairman appeared to have helped the S&P 500 scramble off the day’s low by the time Wall Street closed on Friday. It was not enough to take the market into positive territory on the day, and when trading starts in Asia tomorrow, global markets will also have to digest the worst Chinese manufacturing data in history, released after the American markets closed.

More information is due during the week, including crucial US employment data and a meeting of the oil-producing nations of Opec. All that will need to be assimilated.

As Milligan put it: “A week is a long time in markets.”

Source: Jill Treanor and Sabah Meddings of the Times

How much do you need to retire?

A question often asked is ….How much do I need to retire comfortably?

Many people are unsure how much they will need in their pension pots in order to provide for a comfortable retirement. Some believe that they will need the equivalent to their current wage, although between half and two thirds of the final salary is also considered sufficient, as their mortgage will have been paid off and the children will have left home.

The key questions are:

• How much income money will I need in retirement?

• How much money will I need to save in advance to deliver that income?

Which? Money has surveyed more than 6,000 retirees to find out what their spending habits are in order to answer these questions.

How much do people spend in retirement?

Retirees in their survey spent around £2,220 a month per household.

To help figure out how much you need in retirement, they have spoken to thousands of retired Which? members to see where their money is being spent. Households spent a shade under £2,220 a month, or around £27,000 a year, on average when they carried out research in 2019. This covers all the basic areas of expenditure (which had a combined cost of £17,800 per year on average) and some luxuries, such as European holidays, hobbies and eating out. Aiming for this level of income will provide a good platform for your retirement.  You’d need £42,000 a year if you include luxuries such as long-haul trips and a new car every five years. Travelling and holidays are a very important part of retirement for our members, with people spending nearly £4,800 a year on this part of their life. Priorities change slightly as you move through your retirement years. Their members tend to spend relatively less on food and drink, housing payments and recreation as they get older, but more on utility bills, health, and insurance premiums.

Average annual spending for retired single people

The charts below show annual spending for a single person.  They have highlighted three levels of spending – paying for essentials, funding a comfortable retirement, allowing a few extras, and being able to have a more luxurious lifestyle. 

Essential lifestyle

Comfortable lifestyle

Luxurious lifestyle

So a luxurious retirement will involve a £33,000 spend.

A comfortable retirement will cost £20,000.

How much money will you need in your pension pot?

It's important to think about your pension income in building blocks - first with the state pension, then with your private or workplace pension savings, and then with any other additional income you might get, from investments or property. 

State Pension

Once you reach state retirement age, currently 66 for men and women, the government will provide a sizeable chunk of your post-retirement money.  The state pension is currently £258.40 per week for a couple (if you qualify for it before 6 April 2016). This is equivalent to £13,437 a year, bringing a couple halfway towards the £27,000 annual income level (before tax).  The full level of new state pension (for people qualifying for it on or after 6 April 2016) in 2019/20 is £168.60 per week, but not everyone gets that much. You can find out why in our guide to how much state pension will I get? In April 2018, the average for a man who qualified after April 2016 was £151.84 a week (£7,895 a year), while the average for a woman was £143.85 (£7,480) a year. Combined, that's around £15,375 a year. 

Final salary pensions

How much extra income you need to generate from your private pension savings will depend on the type of private pension you have.  Defined benefit and final salary pensions pay you a regular monthly income - how much you get is based on your earnings while you were working.  If you have one or more of these, you should receive annual updates telling you how much you can expect to get. Adding that to your state pension (which you can find out by getting a state pension forecast) will help you understand how much you've got to play with in retirement.

Money purchase pensions

A money purchase, or defined contribution, pension sees you invest your pension contributions into a big pot. When you come to retire, you have to decide how to generate an income from it.  You can take your entire pension pots in one go, but this will mean it’s entirely down to you to make the money last and you’ll invariably pay a substantial tax bill. Most people with these pensions will opt for income drawdown or an annuity, or a combination of both when it comes taking money out of their pension.  If this is you, how much will you need in your pension pot to have enough in retirement? They have crunched the numbers.

If you were looking to get a comfortable post-tax income of £27,000 a year and wanted to get a guaranteed income paid to you via a joint-life annuity, you'd need a pot of £298,000, according to their calculations. This also factors in the state pension.  To get the same amount from income drawdown, which sees you keeping your money invested in your pension and withdrawing a regular income, you’d need £215,450. This assumes your savings grow by 3% annually. Producing post-tax annual income of £42,000, including the state pension. (For a married couple this would mean an initial pot of around £695,000 to buy a joint-life annuity or £502,775 invested in income drawdown.)

How much do I need to save into a pension at different ages?

If you wait until you are 40 to begin saving for the future, you'll need to contribute £489 per month to achieve a comfortable retirement by the time you reach state pension age. The figure rises to £1,142 per month if you are aiming for a luxurious lifestyle. The projections contain some quite scary numbers, although saving a few hundred pounds per month from your mid-20s is obviously more palatable than having to find much more if you leave your retirement saving until later in life.

Your monthly income should rise as you move through the decades and if you are in a company pension scheme, your employer will be contributing some towards your target amount. Under the rules of pension auto-enrolment auto-enrolment, a minimum of 8% must be paid into your pension, with 5% coming from you and 3% coming from your employer.  Someone earning the UK average salary of £28,000 will be saving £186 per month. The more you can contribute, or find an employer that matches your contribution or more, the closer you'll get to these targets. The reassuring thing is that although you may not be saving at the above levels in your 20s or 30s, you’d have kicked off your retirement saving, and won’t have to start saving from scratch in your 40s and 50s.

Pension tax relief - free government money

When you save into a pension during your working life, the government likes to give you a bonus as a way of rewarding you for saving for your future. This comes in the form of tax relief.

When you earn tax relief on your pension, some of the money that you would have paid in tax on your earnings goes into your pension pot rather than to the government.

Tax relief is paid on your pension contributions at the highest rate of income tax you pay. So:

• Basic-rate taxpayers get 20% pension tax relief

• Higher-rate taxpayers can claim 40% pension tax relief

• Additional-rate taxpayers can claim 45% pension tax relief

Things work slightly differently in Scotland.

Source: Which?