23 November 2022
The world of wealth management is, in theory, relatively straightforward, but in practice, there are several challenges. For example, in the UK, we recently saw the Autumn Budget announcement, which impacted an array of areas that have previously remained relatively untouched. Consequently, the subject of wealth management and asset management has very much come to the fore.
Whether looking at new asset classes, such as cryptocurrencies or emerging frontier markets, a lot is happening. The UK, US and European economies are also moving at different paces; inflation is having a significant impact, as are increasing interest rates in the face of recession. So while many portfolios will maintain a backbone of asset management allocation across the primary market, recent volatility has made many wealth management companies think again.
UK interest rates are expected to peak at around 5% in 2023, equating to mortgage rates of more than 6%. This is likely to lead to a short- to medium-term fall in house prices, exerting more pressure on already stretched household expenditure. Undoubtedly, this will create many challenges concerning asset management, with interest rates rising to combat inflation while the UK economy is technically in recession.
A comprehensive wealth management service will consider investments and personal finances in the short, medium and longer term. It is essential there is sufficient cash flow to cover living expenses and any future financial liabilities. So how will the recent autumn budget impact personal finance?
The strategy of fiscal drag is used regularly by governments worldwide to increase tax revenues without raising tax rates. However, with tax allowances in the UK frozen until 2028, this will significantly impact personal taxation and household incomes. Technically, this type of strategy allows many politicians to argue they have not broken previous tax rate pledges while at the same time increasing the tax take from individuals.
The announcement that dividend and capital gains tax-free allowances will be slashed was a blow for many investors. The capital gains tax allowance will fall from just over £12,000 to £3000 by the tax year 2024/25. The forthcoming reduction in the dividend allowance, falling from £2000 to £1000, will be followed by a further decrease to just £500. While of little consequence, the tax rate on dividend income has not been changed, with millions of people set to pay more tax on their income.
On a side note, freezing tax allowances also takes ininheritance tax, which will further increase government tax revenues.
Whether looking at pensions or ISAs, wealth managementcompanies are now likely to advise switching more assets into tax-free wrappers. Pension funds are one of the most cost-effective tax-free wrappers, and many were surprised to see no pension changes announced in the budget. However, as the government seeks to fill a £50 billion-plus annual financial shortfall, many believe that pension funds will be targeted at some point. So is the government encouraging a switch to tax-free wrappers before targeting this area, perhaps next year?
There is no doubt that recent changes by the UK government will prompt more complex wealth management review meetings for many clients in the short to medium term. With mortgages and other debt instruments set to become more expensive, while millions of workers will see their tax liabilities increase, household incomes are under real threat.
First and foremost, inflation needs to be brought under control which will inevitably lead to more short-term financial pain for individuals, investors and companies. The question is,after regular economic shocks, which can be traced back to the 2007/8 US mortgage crisis, how much more financial pain can individuals, investors and companies take?
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