A new Chancellor and corporation tax to rise: Latest for pensions, mortgages and investments

At the same time, a further fiscal policy u-turn has been announced with the Government now set to increase the main rate of corporation tax to 25%, instead of keeping it at 19% as had been announced previously. This is the second major tax cut u-turn after the Government recently confirmed it would not go ahead with a plan to scrap the 45p top rate of income tax.

There was no mention of the reversal of the National Insurance increase implemented this summer or the cut to the basic rate of income tax next April, so it must be assumed that for the moment at least these are going ahead.

Jason Hollands, Managing Director of investing platform Bestinvest, says: “It has been a dramatic day after a tumultuous few weeks for UK assets. Whether these policy changes and new faces at HM Treasury will be sufficient to quell jittery markets remains to be seen. The credibility of both the Government and Bank of England having come under pressure in recent days and Prime Minister is far from out of the woods.

“Businesses and investors do not like instability and uncertainty but the retreat on corporation tax at least signals to the bond markets that the Government is responding to concerns about fiscal discipline. The move to keep the corporation tax hike in April 2023 – the policy set out at the last full Budget – seems to be a tactic to appease bond markets with some fiscal balancing, while at the same time trying to retain tax-cutting credentials in terms of personal taxation.

“We still have an autumn fiscal statement on 31 October, but it seems unlikely given the chastening experience of the last three weeks that it will contain anything new or ambitious.”

For investors

Hollands says: “There is of a course a wider backdrop that is not going to go away. Soaring inflation is a global problem, confirmed yesterday by the latest US data, and central banks look set to press ahead with further hikes in interest rates in the near term with consequences for both consumers, borrowers and businesses. Ending over a decade of ultra-low rates and the unwinding vast money printing programmes is proving a painful adjustment for the global economy and financial markets.

“While UK assets have come under notable pressure in recent weeks and have been at the eye of the storm, since the start of the year both global equity and bond markets have seen sharp declines. Until there are signs that inflation has peaked, and that central banks are prepared to pivot away from policy tightening, further volatility is likely and so investors need to hold their nerves.  
 
“That said, markets do look oversold and there are some real opportunities emerging in both bonds and in parts of the equity market such as UK larger-companies where valuations are incredibly cheap, the dividend yield is attractive and where companies should benefit from is very high overseas earnings when these are converted into Sterling profits."

For mortgage borrowers

Hollands says: “Gilt yields have been extremely volatile recently, and it remains to be seen whether this calms down once the Bank of England’s bond buying programme ends today.  Until the gilt market stabilises, mortgage lenders will still struggle to price their mortgage products efficiently, which will probably mean the recent conditions of reduced choice and tougher affordability criteria will persist for a little while yet. And with another big rate rise due in November, the trajectory for mortgage rates looks still to be upwards in the short term.

“The rowing back on tax cuts, and therefore fiscal expansionism, does perhaps mean that the Bank of England will not feel compelled to raise rates quite so high in order to keep inflation down. So on balance, this might mean that mortgage rates do not rise as high into the medium term as had been expected in the last few weeks.

“At times like these, when the loan product landscape is changing so rapidly, a good mortgage broker can be worth their fee – not least because they might be able to expedite the application process and help to grab a product before it is withdrawn.’

For pensions

Hollands says: “Governor Andrew Bailey’s warning earlier this week that the Bank of England would not be stepping in with further bond market intervention beyond today seems to have been a factor in forcing the Truss government to address bond market volatility themselves.

“If today’s events do help calm bond markets then that will be good news for the defined benefit pension schemes that have been facing serious liquidity issues and banking on further BoE help.

"In any case the holders of pensions backed by such schemes are in a very strong position – these used to be called ‘gold-plated’ pensions after all. Pension income from defined benefit schemes is predictable and secure, unlike income from defined contribution pensions or personal pensions. DB or ‘final salary’ schemes must be funded by employers and in the event a firm becomes insolvent, the Pension Protection Fund is there to provide a lifeline for members of the scheme. In the worst-case scenario, those who are members of DB pensions who are yet to retire might have to accept 90% of the due payout if they collapse.

“Wider global market turmoil has hit asset prices and this affects the vast majority of us who hold defined contribution or self-invested personal pension pots as well as Stocks & Shares ISAs. Most savers will have seen their pot fall in value this year and this is unsettling. But savers should avoid panicking, and not be tempted to give up on their pension, because asset prices historically have always recovered in the long term. In fact, by continuing to contribute in market conditions like these savers are picking up cheaper investments with recovery potential once the current economic clouds start to clear.

“For those approaching retirement in the near future the outlook is more difficult, because they will have been expecting to start accessing their pension pot, and doing that now will likely mean cashing in investments that have recently fallen in value. If they can take steps to avoid this, then their long-term retirement finances should benefit.

“These could include:

• Cutting living expenses as much as possible for a year or two so that the minimum amount needs to be drawn from pension savings
• Drawing on other savings or assets instead of funds held in pension investments
• Consider prolonging work, perhaps on a part-time basis, to avoid drawing on their pension while asset values are down.”