Hargreaves Lansdown comments on the appointment of the new Chancellor

Sarah Coles, senior personal finance analyst, and Helen Morrissey, senior pensions analyst, at Hargreaves Lansdown, comment on the appointment of the new Chancellor, detailing 5 steps that he should consider – and 2 to avoid.

Background:

• Nadhim Zahawi has replaced Rishi Sunak as Chancellor.
• He spent his first media appearances emphasising he wants to promote growth and cut taxes.
• How much he can achieve as Chancellor depends to an enormous degree on how long he will spend in the post, which may be relatively fleeting.
• However, whoever ends up in the post, they have a number of key opportunities.

Sarah Coles says:

“Nadhim Zahawi is getting the removal trucks round to number 11 as we speak. And while he may not be in a particular hurry to unpack, just in case another move is on the cards, he has already staked his claim on the job.

“He used his first appearances as Chancellor to position himself as promoting growth and cutting taxes. But there are other jobs we’d like to see added to the to-do list of whoever ends up in Number 11 after the dust settles.”

To do:

1. More support for those on lower incomes

“Those on the lowest incomes will be hit much harder by the cost-of-living crisis than those on the highest wages, and will see far more damage done to their overall financial resilience. This owes much to the fact they have far less wiggle room in their budgets, so they’re struggling to cope with rises in the cost of essentials.

“With less to fall back on, they’re more likely to wipe out any lockdown savings and turn to borrowing. It means that where the government offers support, it may need to be targeted towards those with the greatest needs.”

2. Support people saving for the future as times get tough

“The latest HL Savings and Resilience Barometer, produced with Oxford Economics this week, revealed that rising prices means our pension savings are already falling behind the level we need for a comfortable retirement.

“With inflation sky high, and set to remain so for the rest of the year, it means more people running short of cash and considering cutting back their long-term savings – including pensions.

“While pressures on people’s pockets will dominate the conversation in the short term, the government also needs to keep an eye on the long term and ensure long-term savings are properly incentivised – particularly for self-employed people.

“Otherwise, we’re just storing up a separate resilience problem for later.”

3. Consider all the options for energy

“The cost-of-living payments later this year will help undo much of the damage that’s expected to come in the form of higher energy prices from October.

“However, we’ll still remain far worse off than we were before the most recent hike in April. And while the emphasis on energy costs is lower during the summer, when the winter kicks in, we can expect to see real hardship for millions of people. 

“The government needs to explore every possible option to help protect the most vulnerable, from extra funding for the Warm Home Discount, to additional support through the Universal Credit system, a rethink on taxes on energy, and a meaningful change in the funding of energy efficiency.”

Helen Morrissey adds:

4. Take a fresh look at ISAs

“There’s an opportunity to streamline the range of ISAs, to offer choice without confusion. Child Trust Funds could be rolled into Junior ISAs; Help to Buy ISAs into the Lifetime ISA; and Innovative Finance ISAs into Stocks and Shares ISAs.

“In the case of IFISAs, one reason they’re separate is because you can’t have more than one ISA of each type per tax year. This could be solved by removing this restriction – which would also iron out needless confusion – such as the fact you can’t currently put money in a Help to Buy ISA and a cash ISA in the same year.

“There’s also the opportunity to completely separate the ISA allowances – so the LISA allowance is separate from the overall allowance. This is the single biggest cause of confusion among people considering a LISA, and creates administrative complexity for savers and providers. Separating the two allowances would solve this at a stroke.

“When it comes to LISAs, we want to see the withdrawal penalty cut to 20%. If you take cash out of the LISA before the age of 60 – for any reason other than to buy your first property – you face a penalty of 25%. While it may look like you are just giving up the government bonus it’s more complicated than that, because it takes a chunk of the money you have invested too (£6.25 of every £100). People’s circumstances can change, and we don’t think it’s fair to penalise savers for trying to do the right thing.

“The government should also revisit the £450,000 limit on the value of the property that can be purchased using a LISA. Since it was introduced, prices have risen over 25% and the limit hasn’t moved. The government needs to consider linking this limit to house price inflation, or introducing regional variations, to protect people who simply want to buy an average property.”

5. Tackle the Money Purchase Annual Allowance

“The allowance is meant to stop ‘recycling’, where people access their pension and then re-invest contributions for another round of tax relief, but they add needless complexity and actively prevent people topping up their pension if they’ve been forced to dip into it.

“It could be replaced with anti-recycling rules, which only kick in when someone has accessed their pension with the express intent to recycle the cash. If there’s no intent to recycle, people can rebuild their pension savings and therefore their financial resilience.”

To avoid:

1. Getting in the way of progress on key issues.

“There’s always the temptation to get out the new broom, but we have seen strong progress on a number of issues designed to help people improve their finances, which should remain a priority.

“One that’s close to our hearts is allowing financial companies to offer more useful guidance without stepping over the boundary into advice.”

2. Tinkering for the sake of it

“When we asked our clients about their biggest concern regarding pension saving, the most common worry was that the government would keep making piecemeal changes. Tinkering with rules has been a hallmark of the pension industry in recent years with lifetime and annual allowance thresholds being slashed and then frozen.

“The introduction of tapered and money purchase annual allowances have also thrown a spanner in the works for those on high salaries or who have accessed a pension, as they prevent them from making significant further contributions. It’s no surprise that this constant tinkering has got people worried.

“Pensions are a long-term game and many of these changes have been introduced at short notice rather than as part of an overarching strategy.

“Any further changes to pension tax relief needs to be part of a wholesale considered review rather than tinkering around the edges and the unintended consequences it brings.”

Kindly shared by Hargreaves Lansdown

Main article photo courtesy of Pixabay