Budget 2023: The impact on the stock market & pensions

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On Wednesday 15 March, Chancellor Jeremy Hunt delivered his annual budget to Parliament.

Changes to childcare and the extension of energy bills support have taken much of the limelight over the past week, but what about the impact on the wider economy and the stock market?

Will the scrapping of the Pensions Lifetime Allowance really lead to a host of retirees re-entering the workforce, thus giving UK PLC a much-needed boost? Similarly, will increasing the generosity of childcare provision have the desired impact on employment numbers?

In this article, we’re going to take a closer look at the budget, and explore how the OBR’s updated forecasts could provide some clues for investors. Keep on reading for all of the details, or click on a link to head straight to a section…

Budget 2023: what was announced?

Working parents, wealthy pension savers, and drivers are all likely to benefit from last week’s budget. Here’s a brief overview of what was announced:

    • The Energy Price Guarantee will remain at £2,500 until June
    • Incentive payments for people joining childcare profession
    • Parents on Universal Credit to get around 50% more support for childcare
    • 30 hours of free weekly childcare to be extended to cover children below age of 3
    • Lifetime Pensions Allowance to go (charge removed from 6 April, scrapped by April 2024)
    • Annual Pensions Allowance to be increased to £60,000 from 6 April.
    • Fuel duty to frozen
    • Tax cuts for draft beer sales in pubs
    • £11 billion added to defence budget over next five years.
    • £20 billion for development of Carbon Capture Usage and Storage

See our Spring Statements: The Key Points if you’re looking for more details on the above.

What does the budget mean for pension savers?

For most pension savers, probably very little. That’s because the changes will only really have an impact on those with sizeable pension pots, or the ability to save very large amounts in the future.

For example, the Lifetime Pension Allowance – currently £1,073,100 –  limits the total amount you can put into a pension tax-free without being charged. From 6 April, however, the allowance will essentially be scrapped, as charges will no longer apply from this date. From April 2024, it will officially be scrapped altogether. While these changes may feel pretty significant, only those with a pension pot worth over £1 million will be affected.

Another change announced last Wednesday was a big increase to the Annual Pension Allowance. From April 6 2023, pension savers will be able to stash £60,000 tax-free every year into a pension, up from £40,000.

Sadly, most of the current workforce isn’t saving enough into a pension, so these changes won’t have any impact. However, it’s important to understand why the Government has announced these changes.

On the same day as the budget, the Office for Budget Responsibility highlighted how the UK is suffering from low labour participation rates. To put it bluntly, there are now 830,000 fewer workers in the UK compared to before the pandemic. While 300,000 of these workers have since reached retirement age, there are still 500,000 ‘missing workers’ which many believe is behind the UK’s sluggish economic growth. Also, it’s worth knowing that the UK’s productivity rate is just half the rate that it was in 2008.

As a result of the above, it’s easy to see why the Government has made these changes. It wants to encourage workers to return to work by making pension limits more generous. This is the same reason why it’s also lowering the cost of childcare.

how could the budget impact investors?

According to Jeremy Hunt, ‘No one should be pushed out of the workforce for tax reasons’. However, it remains to be seen whether his pension and childcare changes will have any real impact on the workforce.

For example, it could be argued that those with large pension pots have already retired because they no longer need to work. Therefore, it’s hard to see how the opportunity to put more into a pension pot tax-free will lead to a mass return to the workforce – especially as the incentive only affects wealthy retirees.

Likewise, while increasing the annual allowance may benefit the high earners of today, it’s doubtful that many employees on high salaries will choose to increase their hours solely for the opportunity to squirrel away some extra tax-free cash. And even if it does have a positive impact on productivity, remember that this change will only have an impact on workers currently able to stash away more than £40,000 into a pension each year. This is a small proportion of the workforce.

So while the pension changes may not be overly successful at boosting the numbers of those in work, it could be argued that the increased childcare support will have a far bigger impact – especially among women. That’s because the current high cost of childcare is undoubtedly a massive factor that is keeping many mothers out of the workforce.

the impact on the stock market

Even if the pension and childcare changes won’t impact you directly, it’s worth understanding that if these schemes do lead to an increase in workforce numbers and, more importantly, productivity, then this could have a positive impact on UK-listed stocks.

This is because many believe low workforce numbers and the UK’s current ‘skills gap’ is a big reason why domestic companies are struggling to grow right now. So, in theory, a boost to workforce numbers could be key in addressing this problem.

Following an encouraging start to the year, the FTSE 100 has plummeted by more than 4.7% over the past month – reversing all of the gains made since 1 January. Of course, much of this recent fallout can be attributed to the recent US bank failures, but it’s also fair to say that the UK economy hasn’t been in the greatest shape for a while now. So, could the Government’s budget turn out to indirectly boost the value of our stocks and shares? Only time will tell us.

a word on House prices…

If you’ve a financial interest in house prices, then you may wish to look away now. In its updated forecast, the OBR suggests house prices will fall 10% this year. This 10% decline compares to values in the final quarter of 2022. The prediction comes after Nationwide revealed that house prices suffered a 1.1% year-on-year fall in February. This was first annual decline since June 2020 and the biggest fall since November 2012 ·

Unsurprisingly, the continuing decline in house prices is being blamed on higher interest rates. The OBR predicts high mortgage rates are here to stay. And while it no longer expects peak rates of 5%, 4%-ish rates are predicted for the foreseeable future.

Despite this, it’s worth knowing that the housing market is notoriously difficult to predict. Some individuals are still suggesting house prices will continue rising, and others will believe that now is a good time to buy following recent falls. While we don’t have the answers, if you’re interested in learning about investing in property, take a look at our article that explores ways to make a profit by buying property.

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Disclaimer: MoneyMagpie is not a licensed financial advisor. Information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This isn’t financial advice. Anyone thinking of investing should conduct their own due diligence. 

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