In Lewis Carroll’s children’s book, Alice in Wonderland, the Queen assures an astonished Alice that, with practice, one can believe things to be true that are impossible. A few weeks ago, some of today’s headline would be thought impossible.
U.K. pension rules
In yesterday’s spring budget Chancellor Jeremy Hunt announced changes to pension rules, making tax advantages more generous. The package was wrapped up in fluffy talk of wanting to keep NHS doctors from taking early retirement, but the rules apply to all. They are intended to keep older workers in the labour market.
An increase in the annual tax-free allowance for pension contributions, from £40,000 to £60,000. This had been trailed to the press on Friday and was no surprise.
The lifetime allowance cap of £1.07 million was abolished. The press had been told it would be raised, perhaps to £1.8 million. No one would have believed it would be abolished at breakfast time yesterday.
The impact cannot be underestimated on those who had reached their £1.07 million limit and who faced a 55% tax charge on accessing any surplus. All pension income will now be charged at the marginal rate of income tax, the highest rate of which is currently 45%.
In addition, there will be an increase in the money purchase allowance, from £4,000 to £10,000, for those who have already began drawing on their pension.
The small print. But there are no increases in allowances and in the starting rates, to allow for inflation. The Office of Budget Responsibility (OBR) believes this ‘fiscal drag’ will raise an extra £29bn by 2027/28. To add salt in the wound, the starting point of the 45% tax rate has been reduced, from £150,000 to £125,000.
Meanwhile, the ability to withdraw 25% of the pension as a tax-free cash lump sum has been capped at £268,275.
The banking crisis and investors
Investors have a banking crisis to contend with, with Credit Suisse possibly about to collapse. A fortnight ago this would have seemed impossible.
How will this crisis affect central bank’s ability to tackle inflation, if containing the crisis impinges on interest rate decisions? Christine Lagarde will offer her thoughts after today’s ECB rate announcement, while Jay Powell has another week before he and the FOMC have to express a policy view.
Let’s assume four scenarios (in what is no more than a ‘thinking aloud’ exercise):
1) Fed hikes rates next week, focusing on inflation, while assuring the world that there is minimal risk of a systemic bank collapse thanks to the policies put in place by it and the FDIC last week. There is no systemic bank crisis.
Possible result: short-dated Treasury yields rise, longer-dated fall as shallow recession is priced into the market. Poor for equities in the near term, but investors will start pricing in a new economic cycle well in advance -perhaps from the summer.
2) As above, but there is a systemic bank crisis. The Fed got it wrong. Recession follows, as banks cut back on lending in order to preserve liquidity and to avoid making risky loans. Leveraged parts of the investment world and in the real economy, face severe difficulties as banks refuse to lend. Inflation plummets.
Possible result: Treasury yields fall across the curve, as interest rates are halted and soon cut. Quantitative tightening policies abandoned by central banks. Long-dated Treasuries make particularly strong gains. Very poor for equities and high yield.
3) Fed halts rate hikes, to help calm the markets. There is no systemic banking sector collapse.
Possible result: There is no recession. Core inflation becomes entrenched and interest rates remain well above the levels of the last decade. Perhaps to the satisfaction of governments (who see the real cost of their debt whittled away by inflation) and central banks (who have more room to cut rates in a recession if the starting point is, say, 4% rather than 2%). Short-dated Treasury yields are unchanged, long-dated steadily rise. The yield curve becomes a normal shape. Equities do well, as earnings growth resumes (at least in nominal terms).
4) As above, but a systemic bank crisis does take place.
Possible result: as with 2), but perhaps a less severe crisis as the cost of short-term money isn’t as high. Good for Treasuries, bad for equities.
Regarding the bank crisis itself. The problem is not based around bad quality assets -so often the cause of a banking crisis. Silvergate was not investing in crypto, although its client base was dominated by crypto-related companies. SVB did not have a problem of loan defaults from its tech-related client base. Credit Suisse’s lending (at least in Switzerland) is famed for its caution.
Neither is balance sheet strength. Credit Suisse boasted a 14.1% Common Equity Tier 1 capital ratio last month, suggesting plenty of loss-absorbing capital on its balance sheet and more than is required for a typical systemically important bank.
The fundamental solvency of all the banks involved in the current crisis and of the sector as a whole, suggests that the banking crisis can be contained.
Rather, it has been liquidity problems, arising from mis-matching assets with liabilities that has brought down the three American banks. The Fed and FDIC’s policy interventions have minimised the risk of other such failures amongst the lightly regulated small and mid-sized banks, with measures designed to ensure liquidity is at hand.
Credit Suisse has been plagued by many years of misjudgement, over an extraordinary number and variety of issues. The U.S. regulators have long had it in their sights and more recently the Swiss authorities have taken a sterner approach.
It appears to be a one-off, though, undoubtedly the higher cost of funding its balance sheet has played a role.
Fingers crossed.
Investors should remain diversified, across a broad range of assets, in order to protect their portfolios. Impossible things are happening.
There may well be a time to take more opportunistic approaches to investing, but current financials and economic conditions are -to say the least- complicated and a multi-asset investment approach is to be preferred. This will help hedge against most of the above scenarios.
Ready to find out more?
At Brite Advisors USA, we work with UK ex-pats all over the USA on their investment needs, both retirement and non-retirement. Our US-based advisory team seeks to provide an outstanding experience for all clients.
We facilitate UK pension transfers using UK Self-Invested Personal Pension Plans (“SIPP”) provided by UK-regulated pension trustees for clients who want to save for their retirement by taking advantage of potential stock market growth.
No Investment Advice: This financial commentary is for informational purposes only and is not intended to be, and should not be, construed as an offer to sell or a solicitation of an offer to buy any security or financial instrument or invest in any equity or investment strategy. It should not be used to form the basis of any investment decision.
Investment Risks: There are risks associated with investing in securities and past performance is not indicative of future results. Always seek professional advice before investing.
Not Legal/Tax Advice: This financial commentary is not intended to be, and should not be construed as, legal, regulatory, tax, or accounting advice. Always seek professional advice and consult with your legal counsel, tax and accounting advisors when contemplating any course of action.
Discover the pros and cons of timing the market vs. time spent in the market. Explore the emotional challenges, risk factors, and potential returns of these investment strategies to make informed financial decisions.
Each of the stock market sectors have companies worth looking at. In this article we highlight some of the most promising companies in each of these 11 sectors that could potentially provide investors
Each of the stock market sectors have companies worth looking at. In this article we highlight some of the most promising companies in each of these 11 sectors that could potentially provide investors
Taking Stock: Several impossible things before breakfast
In Lewis Carroll’s children’s book, Alice in Wonderland, the Queen assures an astonished Alice that, with practice, one can believe things to be true that are impossible. A few weeks ago, some of today’s headline would be thought impossible.
U.K. pension rules
In yesterday’s spring budget Chancellor Jeremy Hunt announced changes to pension rules, making tax advantages more generous. The package was wrapped up in fluffy talk of wanting to keep NHS doctors from taking early retirement, but the rules apply to all. They are intended to keep older workers in the labour market.
An increase in the annual tax-free allowance for pension contributions, from £40,000 to £60,000. This had been trailed to the press on Friday and was no surprise.
The lifetime allowance cap of £1.07 million was abolished. The press had been told it would be raised, perhaps to £1.8 million. No one would have believed it would be abolished at breakfast time yesterday.
The impact cannot be underestimated on those who had reached their £1.07 million limit and who faced a 55% tax charge on accessing any surplus. All pension income will now be charged at the marginal rate of income tax, the highest rate of which is currently 45%.
In addition, there will be an increase in the money purchase allowance, from £4,000 to £10,000, for those who have already began drawing on their pension.
The small print. But there are no increases in allowances and in the starting rates, to allow for inflation. The Office of Budget Responsibility (OBR) believes this ‘fiscal drag’ will raise an extra £29bn by 2027/28. To add salt in the wound, the starting point of the 45% tax rate has been reduced, from £150,000 to £125,000.
Meanwhile, the ability to withdraw 25% of the pension as a tax-free cash lump sum has been capped at £268,275.
The banking crisis and investors
Investors have a banking crisis to contend with, with Credit Suisse possibly about to collapse. A fortnight ago this would have seemed impossible.
How will this crisis affect central bank’s ability to tackle inflation, if containing the crisis impinges on interest rate decisions? Christine Lagarde will offer her thoughts after today’s ECB rate announcement, while Jay Powell has another week before he and the FOMC have to express a policy view.
Let’s assume four scenarios (in what is no more than a ‘thinking aloud’ exercise):
1) Fed hikes rates next week, focusing on inflation, while assuring the world that there is minimal risk of a systemic bank collapse thanks to the policies put in place by it and the FDIC last week. There is no systemic bank crisis.
Possible result: short-dated Treasury yields rise, longer-dated fall as shallow recession is priced into the market. Poor for equities in the near term, but investors will start pricing in a new economic cycle well in advance -perhaps from the summer.
2) As above, but there is a systemic bank crisis. The Fed got it wrong. Recession follows, as banks cut back on lending in order to preserve liquidity and to avoid making risky loans. Leveraged parts of the investment world and in the real economy, face severe difficulties as banks refuse to lend. Inflation plummets.
Possible result: Treasury yields fall across the curve, as interest rates are halted and soon cut. Quantitative tightening policies abandoned by central banks. Long-dated Treasuries make particularly strong gains. Very poor for equities and high yield.
3) Fed halts rate hikes, to help calm the markets. There is no systemic banking sector collapse.
Possible result: There is no recession. Core inflation becomes entrenched and interest rates remain well above the levels of the last decade. Perhaps to the satisfaction of governments (who see the real cost of their debt whittled away by inflation) and central banks (who have more room to cut rates in a recession if the starting point is, say, 4% rather than 2%). Short-dated Treasury yields are unchanged, long-dated steadily rise. The yield curve becomes a normal shape. Equities do well, as earnings growth resumes (at least in nominal terms).
4) As above, but a systemic bank crisis does take place.
Possible result: as with 2), but perhaps a less severe crisis as the cost of short-term money isn’t as high. Good for Treasuries, bad for equities.
Regarding the bank crisis itself. The problem is not based around bad quality assets -so often the cause of a banking crisis. Silvergate was not investing in crypto, although its client base was dominated by crypto-related companies. SVB did not have a problem of loan defaults from its tech-related client base. Credit Suisse’s lending (at least in Switzerland) is famed for its caution.
Neither is balance sheet strength. Credit Suisse boasted a 14.1% Common Equity Tier 1 capital ratio last month, suggesting plenty of loss-absorbing capital on its balance sheet and more than is required for a typical systemically important bank.
The fundamental solvency of all the banks involved in the current crisis and of the sector as a whole, suggests that the banking crisis can be contained.
Rather, it has been liquidity problems, arising from mis-matching assets with liabilities that has brought down the three American banks. The Fed and FDIC’s policy interventions have minimised the risk of other such failures amongst the lightly regulated small and mid-sized banks, with measures designed to ensure liquidity is at hand.
Credit Suisse has been plagued by many years of misjudgement, over an extraordinary number and variety of issues. The U.S. regulators have long had it in their sights and more recently the Swiss authorities have taken a sterner approach.
It appears to be a one-off, though, undoubtedly the higher cost of funding its balance sheet has played a role.
Fingers crossed.
Investors should remain diversified, across a broad range of assets, in order to protect their portfolios. Impossible things are happening.
There may well be a time to take more opportunistic approaches to investing, but current financials and economic conditions are -to say the least- complicated and a multi-asset investment approach is to be preferred. This will help hedge against most of the above scenarios.
Ready to find out more?
At Brite Advisors USA, we work with UK ex-pats all over the USA on their investment needs, both retirement and non-retirement. Our US-based advisory team seeks to provide an outstanding experience for all clients.
We facilitate UK pension transfers using UK Self-Invested Personal Pension Plans (“SIPP”) provided by UK-regulated pension trustees for clients who want to save for their retirement by taking advantage of potential stock market growth.
Contact us today to find out more.
Disclosures:
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