AJ Bell’s analysts unpick they key points confirmed in today’s Budget announcement, including:
• Furlough extension and re-opening of the economy
• Pension lifetime allowance frozen
• LISA exit charge to increase back to 25%
• State pension triple lock retained
• No mention of the MPAA
• Income tax bands frozen
• Stamp duty holiday extended
• Mortgage guarantee scheme
• NS&I Green Bond
Danni Hewson, financial analyst at AJ Bell:
Furlough extension and re-opening of the economy
“The chancellor has continually promised to do “whatever it takes” to support businesses and workers through lockdown so it’s come as no surprise that both the furlough and SEIS schemes have been extended, at least for a little while.
“There’s a clear change in focus from getting through to getting out, with a new £5bn scheme for small companies being labelled a ‘re-start’ grant, there’s money for the arts and a bid for the 2030 World Cup all optimistically hinting at better days to come.
“But there’s still a long, difficult spring to overcome and optimism that the vaccine rollout will bolster consumer confidence must be translated into quick revenue if more businesses aren’t to fall by the wayside.
“Investors will be monitoring markets carefully over the coming weeks making sure change, however it comes, doesn’t leave them behind.”
Tom Selby, senior analyst at AJ Bell:
Lifetime allowance frozen at £1,073,100 for the rest of this Parliament – raising £1 billion between now and 2025/26
“While freezing the lifetime allowance at just over £1 million might sound like a relatively minor move aimed at the wealthiest in society, large swathes of middle Britain are now at risk of being dragged into its net.
“High-earning doctors and consultants in the NHS who benefit from generous defined benefit pensions, for example, will be among those hit by this measure.
“Furthermore, the longer it is kept at the current level, the more it will cap the retirement saving aspirations of future generations.
“The impact will depend in part on what happens to inflation over the next four years. If CPI were to rise in line with official OBR forecasts, it would imply an increase in the lifetime allowance of around £85,000 by 2025/26.”
Lifetime ISA exit charge increases back to 25% in April
“It is hugely disappointing the Chancellor didn’t use his Budget statement to, at the very least, keep the LISA early withdrawal charge at 20%.
“The logic for reducing the withdrawal charge from 25% to 20% was the fact LISA holders may face income pressure as a result of the lockdown.
“Given millions of people will continue to face employment uncertainty in the coming months – and particularly when the furlough scheme is finally scaled back – that logic remains at least as relevant for 2021/22 as it is for 2020/21.
“If you are under age 60, have money saved in a LISA and are planning to access it for anything other than a first home purchase in the near future, you should consider doing so before the withdrawal charge increases back to 25% from 6 April 2021.”
State pension triple-lock retained
“Given the parlous state of the nation’s finances, many expected the Chancellor to wield the axe on the state pension triple-lock.
“However, the Chancellor has, at least for the time being, left the policy alone, perhaps fearful of the impact targeting the state pension could have on people who leant the Conservatives their vote at the last general election.
“Regardless of arguments around fairness and cost, if the Government had reneged on its triple-lock manifesto commitment it would have risked being heavily punished at the ballot box in four years’ time.”
No mention of Money Purchase Annual Allowance
“Rishi Sunak’s failure to address this is a real blow to millions of savers. More than £9 billion was withdrawn flexibly from pensions in 2020, while hundreds of thousands will have accessed their retirement fund for the first time during the year.
“Within those numbers there will inevitably be people who have been forced to dip into their pension as a result of Coronavirus. This behaviour could range from someone replacing lost salary from employment to helping a younger relative pay their bills or older relative cover care costs.
““Even before the pandemic struck, slashing someone’s pensions annual allowance by 90% - from £40,000 to just £4,000 – merely for accessing £1 of taxable income from their retirement pot felt grossly unfair and it now leaves people facing an uphill battle to rebuild their retirements.”
Laith Khalaf, financial analyst at AJ Bell:
Income tax bands frozen
“The Chancellor has reverted to a tried and tested method of increasing taxes without raising the hackles of the electorate, by freezing allowances after April this year until 2026. Usually the Treasury is a bit sneakier, bumping allowances up by inflation rather than earnings each year and creaming off the difference, in a process called fiscal drag. Freezing allowances is fiscal drag on steroids and will collectively cost taxpayers £19 billion over the next five years. It will slowly but surely mean that from 2022, millions of people will pay more income tax, without the government actually adjusting the headline rate.
“The stealth tax works because while allowances stay frozen, wages rise. Assuming 4% wage growth, someone earning £41,000 today will be earning £50,000 in five years’ time, and potentially starting to pay higher rate tax. To be fair, basic taxpayers have had a pretty good run of things of late, with the personal tax-free allowance increasing from £6,475 in 2010 to £12,500 today and £12,570 from April. Higher earners weren’t treated quite as kindly, but the higher rate threshold has risen from £43,875 in 2010 to £50,000 today and £50,270 from April, an average increase of about 1.3% a year. The people who will feel the sharpest pain are those just under the thresholds, because as their earnings rise, the amount of money they take home per £1 of extra gross salary goes down significantly.”
Stamp duty holiday extended
“The Chancellor has kicked the can down the road on the stamp duty holiday, on the basis that some homebuyers will face a cliff edge at the end of March under current plans to withdraw the scheme. There is some justification for a temporary extension, seeing as the stamp duty holiday itself has created such a frenzy that the property industry has struggled to keep up, creating a backlog of unfulfilled demand. As any retailing executive will tell you, there’s always a week after a promotional sale when customers are miffed because they just missed out, so the extension and gradual tapering of the tax perk will create a softer landing, with less indignation all round. But it’s not a cheap measure, estimated to cost the taxpayer around £1.6 billion.
“There is still the question of whether the measure was ill-conceived to begin with, pouring fuel on a sizzling property market that has been fired up by record low interest rates, and a chronic under-supply of housing. Property prices had already floated out of the reach of many would-be buyers and rose a further 8.5% over 2020. We have to ask whether it would have been such a bad thing to have a more modest rise in property prices, in a year when so many parts of the economy suffered, and so many young people lost their jobs.”
Mortgage guarantee scheme
“The pandemic has been particularly brutal to the financial prospects of the younger generation, who have lost their jobs in droves. A fresh mortgage guarantee scheme is a welcome boost to help first time buyers onto the property ladder, seeing as the first rung seems to be disappearing out of view. However, the affordability crisis can be partly put down to previous political meddling, with the government unwilling to let the market find its own natural price level and choosing instead to bolster demand whenever it looks to be flagging.
“Following an 8.5% rise in property prices in 2020, thanks to the Stamp Duty holiday, a new mortgage guarantee scheme now looks necessary. But it only runs until the end of 2022, and the Treasury needs to give some thought to how it weans the property market off taxpayer support after that date, or alternatively commits to stimulus for the long term. Otherwise, it is just delaying the inevitable day of reckoning, when the property market will have to stand on its own two feet. When that day comes, those who miss out on government support will look back at those who enjoyed it with envy and legitimate frustration. If property prices continue to consistently rise above wages, Generation Rent is simply a mantle that will pass from one generation to the next.”
NS&I Green Bond
“The new NS&I Green bonds are likely to sell like hotcakes, seeing as environmental concerns are really beginning to take hold with savers and investors. The product is expected to land in summer, hopefully enough time for NS&I to sort out the administration problems it has encountered of late, before it’s hit with a fresh wave of demand. The interest rate paid on the bond will be a key determinant of its success. Too low, and it won’t put bums on seats, too high and there are inevitably questions about costs to the taxpayer, as there were with George Osborne’s NS&I “Pensioner Bonds”. The green bond doesn’t form part of NS&I’s finance target for next year, which suggests the Treasury has high hopes for its popularity.”