Lifetime ISA
Pension tax relief
Tax giveaways
State pension triple lock
GDP growth
Inflation
The budget deficit
Fiscal policy vs monetary policy
Pensions and savings – Tom Selby, senior analyst:
Lifetime ISA. “It feels like the Lifetime ISA is too far down the road for major changes but it has some vocal critics, including two former pensions ministers so it will be worth keeping an eye on any surprise changes to the rules. The exit charge seems overly punitive given that exit fees have been capped at 1% for pensions and the maximum age requirement of 40 restricts the product from some core groups that could benefit, such as the self-employed.”
Pension tax relief. “The increasing cost of pension tax relief will not have gone unnoticed by the new Chancellor. Whilst it is unlikely he will tear up the existing system at a time of such constitutional turmoil for the UK, there is a chance that we could see some further tweaks to the existing pensions allowances to raise cash for the Treasury. All eyes will be on whether he slips in any further reductions to the annual or lifetime allowances. This would be disappointing as it would hit middle income savers and further undermine pension savings in the UK at a time when he should be doing exactly the opposite.
Tax giveaways. “This may be wishful thinking given the state of the Government’s finances but the new Chancellor may want to stamp his mark with a headline grabbing move. A reduction in VAT is a move to look out for which would potentially help offset rising inflation and keep people spending. Accelerating the planned increases in the personal allowance is also an option. Alternatively he could look at savings allowances. The ISA allowance is already due to increase to £20,000 in 2017/18, but the Chancellor could, with the 2020 general election in mind, be tempted to further raise ISA limits to show the Government remains on the side of savers. The Treasury also introduced a ‘savings allowance’ this year and increasing that allowance may be tempting if Hammond wants to demonstrate this Government is looking after all savers in the UK.”
State pension triple-lock. “The state pension triple-lock, which guarantees an annual increase in line with the highest of earnings, prices and 2.5%, appears doomed in the long-term after the Work & Pensions Committee recommended scrapping the policy. One potential get-out would be to expand the independent Cridland Review of the state pension age to include an evaluation of annual increases. This could take some of the electoral sting out of a hugely unpopular policy move.”
Investments and the economy – Russ Mould, investment director:
GDP growth. “In March, the Office for Budget Responsibility (OBR) yet again shaved its GDP growth forecasts to 2.0% in 2016, 2.2% in 2017 and 2.1% for 2018. The Bank of England was much more cautious in its November Inflation Report so it will be interesting to see if Chancellor Hammond announces a downgrade in the OBR numbers. The failure of a weak pound in the third quarter to boost export numbers is a concern, although it is still early days. Lead indicators such as the purchasing managers’ indices sentiment surveys have rebounded nicely, while concurrent indicators like retail sales have held up well and lagging indicators like jobs numbers remain strong."
Inflation. “Back in March the OBR forecast 0.7% inflation for 2016, 1.6% for 2017 and 2.0% for 2018. However, the post-referendum plunge in the pound and a rally in oil from its winter lows below $30 a barrel have moved the goalposts so we can expect to see these forecasts revised upwards by the OBR. November’s Bank of England Inflation Report forecast inflation rates of 1.3%, 2.7% and 2.7%, while some independent commentators think the rate of price increases could (fleetingly) exceed 3% next year.”
The budget deficit. “Chancellor Hammond seems to have already abandoned plans for a budgetary surplus in 2019-20 although he has argued the Government remains committed to reining in the overall deficit. This tone suggests forecasts of a £55.5 billion annual deficit this year, followed by £38.8 billion and £21.4 billion will be raised and Chancellor Osborne’s target of a £10 billion surplus in 2019-20 will be kicked into touch.”
Fiscal policy versus monetary policy. “Sluggish GDP figures suggest the Bank’s monetary policy is failing to deliver the growth the Prime Minister wants to see so it will be interesting to see if Hammond does add some fiscal stimulus to the pot and how it will be funded. Prime Minister Theresa May has made great play of infrastructure investment, floating the idea of “infrastructure bonds” to pay for it, something which may prove popular with institutional and private investors alike. Look out for investment in physical infrastructure, as well as longer-term, less tangible but equally valuable areas such as research, intellectual property and education.”