The past few weeks have been a bit of a whirlwind to say the least, and we acknowledge that times like this can be difficult to navigate, so here’s our way of helping you understand what it all means.
What could the mini-budget mean for you?
Last month, Chancellor Kwasi Kwarteng announced some changes to public finances as part of his mini-budget in the government’s attempt to boost economic growth in the UK. Here’s what the changes could mean for you:
Source: HM Treasury, The Growth Plan 2022 (1)
There was initially a proposed removal of the 45% higher income tax rate, but the Chancellor soon backtracked on this on the 3rd of October following heavy criticism.
What is happening to the pound?
Following the Chancellor’s announcements above, last week the value of the pound reached an all-time low against the dollar.
Why did this happen?
The planned tax cuts are the largest tax cuts the government has announced in 50 years and this makes investors nervous as it is likely that the government will have to borrow from international lenders. There are also concerns the tax cuts may cause higher inflation, as they are intended to give people more money to spend.
Investor nervousness + inflation concerns -> a negative reaction in the market as people lose trust in the stability of the UK’s economy.
What does this mean for interest rates?
A weaker pound can further increase inflation because importing things becomes more expensive (as you get less for your money). This will mean prices in the shops are likely to increase.
This in turn, is likely to cause the Bank of England to increase interest rates even more, so that the cost of borrowing for businesses and people (e.g., mortgages!) will rise. There are predictions that interest rates could rise to 6% by mid-2023.
What does this mean for savings?
There is a silver lining in all of this, in that there is likely to be an increase in interest rates on savings, after what seems like an eternity at returns of 1% or below! It’s probably worth shopping around to ensure you get the best possible deal.
So what might this mean for investments?
The impact on investments will depend on the stocks in a portfolio, and/or what stocks a fund is comprised of, and where those companies make their money.
Wealth8 funds are diversified, which means that the funds are made up of stocks from a range of different companies. This can mean while some stocks can fall in value, at the same time the value of other stocks may rise, which can balance a portfolio out. This diversification means less exposure to extreme highs and lows of the market.
As always, long-term investing is about remaining calm during times like these and reminding yourself that, while past performance is not a guarantee of future returns, history has shown us that the longer you stay invested, the better your chances of reaching your financial goals.
With investment, your capital is at risk. Tax treatment depends on individual circumstances and may be subject to change in the future.
This article should not be read as personal financial advice. Individual investors should make their own decisions or seek independent advice.