Lipstick, pigs, pensions and a bank run

A slightly longer blog this week. If you want to cut to the chase, our summary of the Budget can be read here. I’m also talking pensions in more detail, and explaining what really caused the Silicon Valley Bank run.

Despite Jeremy’s Jollity, the economy is the Pig in my tale (tail?)

We’re borrowing a lot. And this debt gets more painful as interest rates rise.

Growth is very low. We’re not making more stuff and we’re not making more money. And too many people are stopping work too early.

Finally, there are a lot of hungry mouths to feed. Defence, childcare, public sector wages, energy support, an ageing population – and the list goes on.

This is an ugly situation before you add in global woes and stability questions (more on banks later).

Where does the wonga come from? Tax. So you freeze income tax thresholds (more people get hoiked into higher tax bands), you cut capital gains tax allowances, you cut dividend allowances. You shove up tax wherever humanly possible. And you cross everything in sight and hope that interest rates fall so that nasty debt burden falls.

Pension and the Budget

In a break from normal programming, we brought you our round-up of the Budget on Wednesday. I’m going to touch on pensions in more detail here.

A quick reminder on why pensions are awesome. Completely different to the State Pension and any workplace pension, we can all build up a private pension as well. You can set one up yourself online from about £50 and with 10 minutes.

Why bother? Free money (ish). Basic rate taxpayers put in £80 and your pension provider then tops it up immediately with a further £20 – this is a refund from the Government of the income tax you’ve paid on that money already. Higher rate taxpayers go further and add this pension contribution to their tax return – which has the effect of lowering your tax by a further £20. (More for additional rate taxpayers and the numbers are a wee bit different in Scotland.)

There are limits to these tax refunds. So there is a cap on how much we can pay in each year. From 5th April it will go up to a huge £60,000 each year. And you can use the previous three years’ allowance. Irrelevant to most of us but anyone with a cash lump sum should at least consider it.

Here’s an example – if someone has not used any of their allowances, the maximum they could pay in from April would be £180,000 (the former annual limit of £40k x 3 plus the new £60k limit) – and they would save up to £81,000 of tax. Cowabunga.

The Lifetime Allowance is not just for Jacob Rees-Mogg

Before Wednesday, the total pension allowance was a little over a million quid. Save any more than that into a pension and you would be spanked with punitive tax. This limit was scrapped in the Budget. I know from years of talking to all and sundry about money that this really was a reason that many doctors would accelerate plans for retirement. There was no incentive to work and build the pension further. (Get the world’s smallest violin out… but if we want more senior doctors, this will work.)

I know a million quid sounds like it only applies to Jacob Rees-Mogg but a mid-level manager with a generous public sector salary and decades of bull runs in stock markets can find themselves there.

Remember you will still pay tax on at least 75% of your pension

The lesser-discussed part to this is that the tax-free part of any pension has been frozen. For most of us, we can take 25% out of our pension tax-free. But this tax-free amount is now capped at a maximum of £268,275. Anything you take out above this amount will be taxed at your income tax rate. So do your planning.

What if Labour rip this up?

Pensions have always been low-hanging fruit for Chancellors and the history of tinkering is breath-taking. It makes it very hard to plan but I don’t think we can sit on our hands because of what the Opposition party says on Budget Day. If you are nearly 55, or over 55, and a high earner, then you may want to pay in as much as possible, and potentially remove a lump sum the day before the next general election! But this is complex and I think warrants financial advice. The stakes are too high and the room for error too significant to rely on a blog or the weekend papers.

And finally – don’t be put off by all this talk of £60k and £1 million. Too many people already feel ‘too poor’, ‘not good enough at Maths’, or just ‘not that sort of person’ about pensions. With tax take on this rise, pensions are an amazing tool for everyone. And you can start with £50 - £100 in most cases.

We have loads more info on pensions here. Takes less than an hour, it’s split into bite-size chunks and will give you the info with none of the waffle.

In other news… Silicon Valley Bank

There’s a nasty aftertaste from this and I don’t think we’ve heard the end of it.

Here’s the business model of a bank. Accept deposits from the hoipolloi and pay them a bit of interest. Reparcel up all the money and lend to people in suits and Governments who will pay you more interest. Good, innit?!

Here’s the snag. The people in suits will only agree to pay you more interest if they’re a) a bit dodgy or b) you agree to lend them money for longer. “Oh OK I’ll give you 5% a year but you have to lend me the money for 3 years.”

Oh b@lls, it’s all gone horribly wrong

The problems start when these longer-term loans start to behave badly, when the interest rates are not locked in (hedged) and people forecast rates falling in the future. If rates shoot up and then are forecast to fall in future, we see an ‘inverted yield curve’. You get more on short-term loans than long-term ones.

So a) there is a mismatch in timeframes and b) you’ve committed to longer-term loans which are suddenly paying less than you need and c) oh b@lls, it’s all gone horribly wrong!

And then your customers get a sniff of weakness. The rumours start. Everyone wants their money back. And it’s not just sitting there in an old-fashioned safe but in these long-term loans which are locked up and now not even paying you more!

In a nutshell, the bankers are not used to a world of rising interest rates and forgot to worry about this. And SVB are not the only ones. As with most banking crises, it’s the collapse in confidence that is the nail in the coffin so expect to see the industry, Governments, central banks and regulators move heaven and earth to shore things up.

Finally, the fact that the Europeans put up interest rates by 0.5% yesterday despite this backdrop is a sign of quite how worried they are about inflation.

Phew! Sorry about that... We are finished!

A busy week in the world of not boring money! Coming up next week, a reminder that I’m hosting a free lunchtime webinar next Friday for our women readers to take your questions on ISAs and pensions. Adviser Jeannie Boyle is running a smaller workshop on sustainable investing next Wednesday. And you have 19 days left till tax year end – you can see our 2023 Best Buys here if you need ISA or pension inspo!

I am looking forward to my 6 o’clock Friday snifter tonight. The Budget cut the duty on ale by 11p a pint in pubs. If he’d cut duty on a pint of champagne, I’d be feeling a lot happier.

Holly