Autumn Statement: Hunt for cuts

Susannah Streeter: Hello and welcome to Switch Your Money On. I’m Susannah Streeter – Head of Money and Markets here at Hargreaves Lansdown – and I’m in the studio with Sarah Coles – Head of Personal Finance – and, Sarah, it’s fair to say that this studio has seen quite a lot of action over the past week or so, particularly since such a jam-packed Autumn Statement.

Sarah Coles: Yes, it was really hectic. There was a lot of the things that have been speculated about beforehand – that they got firmed up – and a lot of things were put on the backburner as well.

Susannah Streeter: You could say that some of those rabbits got stuck in the hat. I won’t reveal their full, furry form until later next year!

Sarah Coles: So, we got the cut to National Insurance, which was even bigger than had been rumoured – with the main 12% rate down two percentage points – so a worker on the average income will see their tax fall by around £450. There was also a cut for self-employed people.

There were some really welcome changes to ISAs too, allowing multiple ISAs of the same kind in a single tax year from April and partial transfers of ISAs that have been paid into the current year, which are both sensible ways to inject much needed flexibility and simplicity into the system.

Susannah Streeter: Then, of course, there were those moves on incentivising companies to invest more to help boost the economy – and the changes afoot when it comes to improving the electricity network for the green revolution.

Sarah Coles: We’re gonna be picking through all of this and more in this episode of the Switch Your Money On podcast – in an episode we’re calling ‘Hunt for Cuts in the Autumn Statement.’

Susannah Streeter: Yes, we’re gonna be looking at the big moves – and what they could herald for businesses, the economy, people and their pensions – and for the general election, which needs to take place by January 2025 – with our Head of Public Affairs, Anne Fairweather.

Sarah Coles: We’ll also speak to Helen Morrissey about some of the pension changes unveiled and what they mean for us all, plus we’re gonna be catching up with some of the shares and funds we suggested could be ones to watch with Sophie Lund-Yates – our Lead Equity Analyst – and Emma Wall – our Head of Investment Research and Analysis.

Susannah Streeter: But, first, let’s drill down into the big changes and how they could have an impact on the world of investing and the wider economy.

First of all, Sarah, we were primed to expect announcements to boost investments in equities, reforms to ISAs and pensions – and measures to try and boost growth. In many ways, it didn’t disappoint, but there was quite a lot left out.

Sarah Coles: Yes – so I mentioned the National Insurance cut, and the overriding argument for making changes to tax and income is that this puts money back in people’s pockets – and it helps with the cost-of-living crisis – but the missing piece was there was no rise in the National Insurance and income tax thresholds. So, it means that, as wages rise, more people will be pulled into paying these taxes, so the tax pain will continue to be felt further down the line.

The Office for Budget Responsibility’s forecast that the tax burden’s going to rise every year to the end of its forecast in April 2029 – hitting 37.7% of GDP – and that’s the biggest burden since World War II – and it’s not just existing taxpayers paying more.

By the end of the forecast, there will be 4 million more people paying income tax – 3 million more paying the higher rate – and 400,000 more paying the additional rate – and this is a massive step-change in the scale of tax which will leave us all worse off.

Susannah Streeter: And, of course, another strong theme in the Statement was business investment. The UK sorely needs a boost to growth with stagnation settling in and a recession still potentially on the cards.

For companies to increase output, incentivising investment really is crucial, so full expensing being made permanent will be highly welcome. It allows firms to offset 100% of their capital expenditure against tax in the year that they spend their money on qualifying machinery and IT equipment. This would help with company cashflow and help boost demand through supply chains.

And it is likely to come as a relief for many UK-based businesses, which have had to deal with a pretty toxic combination of higher labour commodity and borrowing costs. It may also help bolster valuations of London-listed companies which have been weighed down by gloomy prospects about the UK economy. There is still a long way to go to push the country back up the global business investment league, given it’s been languishing at the bottom of the G7 on this metric.

Sarah Coles: The Statement also included cash sweeteners for energy projects. So, the grindingly slow pace of planning applications is part of the reason that key infrastructure projects have been beset with so many delays and increased costs. The government’s clearly worried that net zero commitments won’t be reached if brick walls of opposition build up.

Susannah Streeter: Yes, the idea is that cash sweeteners for residents would turn more NIMBYs into YIMBYs. More likely to vote ‘Yes, in my backyard’ to plans to upgrade the electricity network, such as large pylon sites. Even though there will inevitably be claims that a postcode infrastructure lottery could emerge, it’s clear that incentives to steamroller opposition are needed.

Sarah Coles: After Jeremy Hunt sat down, we then had to delve into the documents to find details of ISA changes that had been widely rumoured before the Statement.

Savers – investors – will be delighted that the Chancellor’s taken the opportunity to pay some much-needed attention to ISAs, so allowing people to pay into multiple ISAs of the same kind in a single tax year from April – and do partial transfers of ISAs that have been paid into in the current year – are both sensible ways to inject much needed flexibility and simplicity into the system.

Susannah Streeter: And also, there are a couple of proposed changes to Innovative Finance ISAs, including expanding them to include Long Term Asset Funds. These offer sophisticated and higher-risk investment opportunities in areas like private equity, infrastructure and real estate. These are generally hard to reach for retail investors and, until now, they couldn’t be held within an ISA.

Innovative Finance ISAs (IFISA) will be extended to include open-ended property funds. However, we still believe liquidity is a concern with such property investments. We think that closed-ended funds are a better way to get pooled exposure, and these are already available through an ISA.

It is disappointing that Jeremy Hunt didn’t take the opportunity to increase the overall ISA allowance. This was last changed back in 2017 – so, in real terms, it’s been gradually eroded by inflation. It’s a shame that Hunt didn’t take the opportunity to make small tweaks to the LISA. It had already helped 171,000 people onto the property ladder – and helped start saving and investing habits that will boost resilience for lifetime – but it has the potential to do even more for homebuyers and retirees.

Sarah Coles: And, talking of homebuyers, it’s also worth highlighting some rather depressing news in the Office for Budget Responsibility Report. Higher mortgage rates are expected to weigh heavily on the property market. The average interest rate on existing mortgages is expected to rise from a low of 2% in 2021 to 5% in 2027. This is already taking a toll on demand, and it’s only going to get worse. Housing transactions have fallen to their lowest level since the middle of the pandemic, and the OBR expects them to fall another 6.9% in 2024. House prices, meanwhile, are expected to fall 4.7% in 2024. The average house price is expected to bottom-out at £266,000 at the end of that year and, from peak to trough, this will be a drop of 7.6%. It’s expected to take until 2027 for house prices to return to their 2022 levels.

Susannah Streeter: So, an awful lot of detail. No wonder it took us so long [laughs] – and it was quite intensive to pick through it all! – but it’s far from all the Statement [laughs] contained!

We can now join Helen Morrissey – our Head of Pensions Research – to explore a little bit more of the changes for pensions in particular.

Sarah Coles: So, Helen, the Chancellor kept you very busy – didn’t he? – with some pension announcements. What were the key ones?

Helen Morrissey: He got started really early by making an announcement around the State Pension. The Chancellor has confirmed that State Pensions will rise 8.5% in line with the triple lock. This is the second blockbusting increase in a row, and there have been concerns that government might opt for a lower increase, such as average earnings without bonuses or inflation.

For somebody on the full new State Pension, this would see their pension grow from £203.85 per week to £221.20 from April. For someone who hit their State Pension age before 2016, their full weekly basic State Pension would rise from £156.20 to £169.50 per week.

So, the announcement will be greeted with relief by pensioners who have been struggling with the rise in cost of living. With inflation starting to fall back, the 8.5% increase could help to put some much-needed space in people’s budgets.

Susannah Streeter: Yes, I agree – the announcement will have made a lot of people happy. We also saw some big announcements on the workplace pension side, didn’t we?

Helen Morrissey: Yes, we did. We saw the Chancellor announce a consultation on Lifetime Pensions. Now, this is where people could choose to have one pension throughout their working life with the right to require any new employer to pay contributions into it. This is rather than having a different once with each employer. This is something that could have a real transformative effect on people’s retirement planning.

Sarah Coles: So, in what way?

Helen Morrissey: With people moving jobs frequently, they would be less likely to lose track of pensions from previous employers if they could choose a Lifetime Pension. Also, having an overarching view of what they’ve accumulated could help them to make more informed retirement decisions.

Research from the Pensions Policy Institute last year estimated that there are around 2.8 million lost pension pots totalling over £26bn washing around the system. This is all money that could be used to boost people’s retirement income, and yet it’s at real risk of not doing so. This is a system that’s failing savers and it’s resulting in lost value.

So, there will be a need to ensure that Lifetime Pensions deliver value for savers, but fixing these leaks of money is a good first step to creating a pension system around people, rather than their employers. It’s also worth saying that this would be just for people who want that extra choice. You would also be free to join your workplace pension scheme if that’s best for you.

Susannah Streeter: That’s great, Helen. There was also some news around pension scheme investment, wasn’t there?

Helen Morrissey: The Chancellor unveiled what he said was a package of measures to unlock pension scheme investment into high-growth sectors to increase returns for savers - this is quite a punchy claim.

It includes plans to boost investment in the science and technology businesses and, in addition, government has confirmed its intention to establish a growth fund within the British Business Bank.

The idea is that offering potential for schemes to invest in a wider range of assets could boost long-term investment return for pension savers.

It is important that final decisions on investment made by pension schemes are made based on what is best for the members. However, these reforms – if they went ahead – have the potential to boost people’s pensions as well as helping the UK economy to thrive. Alongside reforms aimed at consolidating schemes, this could result in a very, very different pension landscape in the years to come.

Sarah Coles: Thanks, Helen – there’s a lot of positive news in there. Was there anything that you were expecting that wasn’t announced?

Helen Morrissey: Yes – I was a bit disappointed to see no movement to reform the Lifetime ISA regime. This has the potential to help people – particularly the self-employed – to prepare for retirement, but there are some key blockers that are putting people off. Firstly, we were hoping that government would reduce the exit penalty on early access to funds from 25% to 20%. We were also hoping to see them change the age-40 limit for opening a LISA. We would like to see people being able to open and contribute up until the age of 55, but there was no movement there either. However, we will continue to raise awareness of the need for this reform.

Sarah Coles: Thanks, Helen. It’s gonna be really interesting to see how pension proposals shape up in the coming months, isn’t it?

Helen Morrissey: It really is – I think it’s gonna be keeping me and the wider pensions industry very busy.

Susannah Streeter: So, there was plenty in the Statement for our pockets and for business, which are clearly government priorities but, of course, they also have their eye on the election. So, let’s bring in Anne Fairweather – HL’s Head of Government Affairs – to explain how these were balanced in the Statement.

Anne, what was your take on it all? There was a lot to take [laughs] in after all, wasn’t there?!

Anne Fairweather: Yeah, there certainly was. It was a busy day with us all beavering away – watching the Chancellor desperately trying to take notes at the same time and trying to work out what the implications were – and I think it’s clear that generating growth will really be at the heart of the election strategy for both main parties going forward. The Chancellor made clear that his initial constraints on spending gave him space for tax cuts – and growth to hopefully follow – whereas Labour are emphasising the conditions for growth more strongly, with their view that a stable government with clear strategies – for things like changing planning laws – will help create the conditions for private sector investment and growth.

Sarah Coles: In terms of the political import of the Statement – what’s your take on that, Anne?

Anne Fairweather: By necessity, this was always meant to be a staging post for a big pre-election budget, but it became a bit of a bigger event. The Prime Minister’s Conference Speech and the King’s Speech fell a bit flat and there were all manner of pressures from the right of his party, so the Prime Minister really needed the fiscal event to be a clear statement of intent for them. The decision to make full expensing on capital allowances permanent is really popular with the business community, and the 2% reduction on National Insurance rates will put £450 back into the pocket of an average employee. The fact that this change is coming in for 6 January means that people will start to get something back before the budget – and actually before a possible May election – and when to call the election though will ultimately rest on the recovery of the economy and the polls as well, but they left this May election option open, I think, with these changes. If the polls don’t change dramatically, then the Prime Minister may still wait until the autumn with the prospect of interest rates being priced in by the markets before then.

Susannah Street: Anne, how do you think the balance was tipped between long-term structural investment and shorter-term sweeteners?

Anne Fairweather: There was 4.5bn announced over five years – committed to attract additional investment into strategic manufacturing – supporting the life sciences and green energy projects. There was also announcements around new investment zones in West Yorkshire, and three more focused on advanced manufacturing in the West Midlands, the East Midlands, and Greater Manchester, so they’re all aimed at boosting UK investment – as are the plans for a concierge service to help overseas investors work through how to access opportunities in the UK. It’s also worth noting that Skills, Infrastructure and Planning were all areas that were highlighted for investment to boost growth. But the Chancellor’s probably hoping that the tax cuts announced – and the protection of the pension’s triple lock – are the big announcements that will capture voters’ eyes.

Sarah Coles: So, going back to the politics of all this, how tricky will the Statement be for the Labour Party? How do you think they’ll priorities the fight for the next general election, given this announcement?

Anne Fairweather: I think, whilst the Autumn Statement was a big event for the Conservatives, the Labour Party really didn’t say very much more in response to the Statement than they’ve said in the rest of the year. For them, there’s no rush to make commitments on tax and spending – when they know the economic outlook could change between now and the election, which ultimately could be a year off. But, for now, I’d say the dividing lines are clear – with the Conservatives pushing their low-tax heritage, and Labour emphasising their record of economic growth in office.

Susannah Streeter: And what do you think we should watch out for now in the budget in the spring?

Anne Fairweather: I think it’s clear that the government want to go further to reduce the tax burden on working families, but will the Chancellor have the headroom to do so? Only time will tell.

Susannah Streeter: Only time will tell, indeed, and we’ll be watching all of the data that comes through to give us some kind of indication. It’s certainly gonna be shaping up to be a very busy year for you Anne – thank you!

Sarah Coles: So, as the government and the Office of Budget Responsibility take stock of how the economy’s doing halfway through the tax year, we thought it would be a good time to take stock of the funds and companies that we’ve suggested could be ones to watch. So, for a shares perspective, let’s bring in Sophie Lund-Yates, who’s been looking at HL’s five share ideas for an ISA.

Sophie Lund-Yates: Hi, Sarah – yes, definitely. To coincide with the start of the new tax year, back in April, we put together some share ideas for an ISA. I won’t have time to go over all five, but will cover a couple. First-up, there was ASML.

So, Netherlands-based ASML is a market lead in lithography machines used to make semi-conductor chips. Without these, you wouldn’t have the chips that power the latest phones, computers, or even cars.

ASML is the sole producer of the most advanced type of lithography machines called Extreme Ultraviolet (EUV) Lithography. It took over two decades to research, develop, and commercialise the technology involved in EUV – which is now a very deep moat for any competitor to try and breach.

Long-term trends such as increasing connectivity, artificial intelligence, unprecedented data volumes, and the energy condition underpin forecasts that the semi-conductive market could double by 2029.

Looking at more recent performance – while it’s still growing, the rate has slowed. Net sales grew by 15.5% to €6.7bn in the third quarter, and operating profit increased by 12.6% to €2.2bn.

Order intake has also come down to €2.6bn from €4.5bn in the previous quarter – some way short of analyst forecasts, as customers showed caution on making new investments in machinery.

Full-year guidance for sales growth approaching 30% remains unchanged. In 2024, the company expects sales to be broadly flat with significant growth expected in 2025.

The longer-term outlook remains robust in our view, but there are some tougher trends to ride out, which could cause some ups and downs.

Susannah Streeter: Thanks, Sophie. We know you like a little bit of luxury – so tell us about LVMH!

Sophie Lund-Yates: [Laughs] I certainly do! LVMH was one of the ISA share ideas too. There are resilient qualities in the Luxury sector, which I’ve touched on before, so won’t bang on about it too much. Essentially, LVMH is a conglomerate which houses some of the world’s most potent high-end brands. Brand power and wealthy customers help soften the blow of economic hardship but, that said, the stock hasn’t been immune to a broader slowdown in consumer spending, which has seen sales growth drop to 14% in the first nine months of the year – down from 17%. Still, I should point out that 14% growth isn’t exactly a disaster and would be considered good going in most businesses.

The valuation has had an 18% knock in the last six months too, as investors try to work out if things will get worse before they get better. I’m still in the camp that thinks the long term outlook for Luxury is very compelling – and LVMH is one of the best in this field. But the market has high hopes, which means this period of uncertainty could see some wobbles occur along the way.

Susannah Streeter: That’s great – we’ll have to keep a close eye on these companies for the rest of the tax year too.

Remember – our investment ideas are not a personal recommendation to buy, sell, or hold any investment. Investments go up and down in value, and there’s always a risk you could get back less than you invest.

Now, we promised we’d also revisit the funds we said were ones to watch back in December last year. So, with that in mind, let’s bring in Emma Wall – our Head of Investment Analysis and Research.

So, Emma – first of all – how did you choose your funds for 2023?

Emma Wall: When we made our fund selections for 2023 – this time last year – we were cautious about the 12 months ahead. We didn’t have a crystal ball and couldn’t have predicted the geopolitical issues the world faces today, but we were concerned about the impact of rising inflation and higher interest rates, political instability, and war on global markets.

As we stated to clients at the time, there was the potential for market volatility in the near term, so we included a selection of fund ideas that we thought were more conservative or had the potential to offer stability during tougher times. They invest across a range of diversified assets. Importantly, no funds here should be considered as standalone investments, and only as part of a wider diversified investment portfolio.

Hence, we selected two mixed asset funds – including one with a focus on capital preservation – a fixed income fund, a UK equity income fund with a value tilt, and a globally diversified passive fund.

Sarah Coles: So, the big question – how have they done?

Emma Wall: Before I answer, I think it’s really important to note! that investments should always be made for the long-term – we suggest at least five years. The selections we made were mindful of the point we were in in the market cycle, and the macro backdrop, but shouldn’t be assessed on one-year performance alone, but over a longer-term horizon. Investors should always make sure they understand the specific risks of a fund before they invest, and make sure the funds objectives are aligned with their own investment goals.

The last year has also faced significant headwinds for investors. Inflation and higher interest rates have meant that there have been less demand for equity markets. Many people have simply preferred to hold cash with rates this high. The devastating Hamas-Israel War has caused market volatility, and a mixed global economic outlook has also weighed on returns.

That said, three of the five selections have outperformed their benchmark – and four out of five have delivered positive returns to investors over the last 11 months to the 31 October 2023, so that’s the last full month. Past performance, of course, is not a guide to the future, and more information on these funds – including longer-term performance and risks is available on our website.

Susannah Streeter: Have the funds delivered what they said they would?

Emma Wall: A great question [laughs]! These funds have differentiated properties that behave differently in different market cycles. So, the bond fund we’ve selected – for example – M&G Global Macro Bond – has lost value due to the rising interest rate environment – but this is typical for bonds. When rates rise, prices fall – and the opposite tends to be true too. As interest rates fall, prices tend to rise, as investors are willing to pay up more on the secondary market for those higher historical yields.

The M&G Global Macro Bond Fund runs a process which blends the big views on the big picture – the economic growth, interest rates, and inflation – with bond selection – so choosing between different currencies to try and generate a combination of income and growth over the long term.

This is the one fund in our selections which has lost money over the last 11 months – and as has the benchmark, although M&G has also underperformed that benchmark.

Sarah Coles: What about the other selections?

Emma Wall: So, Pyrford Global Total Return is a total return multi-asset fund, which aims to preserve capital and protect on the downside – which means holding value in a falling market – although there are no guarantees. Market returns have been mixed over the last year, but Pyrford has held its value – up slightly in the 11 months to the end of October. It has underperformed its benchmark, however, as its [laughs] benchmark is inflation – and we all know how that’s behaved [laughs] in the last year!

Shroeder Managed Balanced also invests in a mix of investments – including global shares and bonds. Investment in company shares could boost long term growth potential, while the other investments provide diversification and could offer some stability in more turbulent times. It has also preserved investors’ capital – up slightly over the period and beating their benchmark of peer funds.

Our final two selections were equity funds. Jupiter Income Trust – run by Ben Whitmore – though it is expected it will undergo a management change in the next 12 months – is a value-biased fund which invests in UK equities the manager considers the market has overlooked.

This fund has outperformed both the benchmark and delivered a small positive return.

Finally, our top performer is the passively-managed Legal and General International Index, which tracks the performance of a range of global markets excluding the UK. It has performed well over the last 11 months, driven in part by the tech exposure in the fund – and it’s outperformed the benchmark too – though, remember, past performance is no guarantee of future returns.

Sarah Coles: I suppose the question on a lot of investors’ minds is, ‘What comes next?’

Emma Wall: Our outlook for 2024 is a cautious one – and our five funds to watch will reflect that. That said, we started this conversation by saying, ‘Investing should be for the long term,’ and it is time IN the market – not timing the market – that gives you the best chance of reaching your financial goals. So, listen to future pods for our fund ideas for 2024.

Susannah Streeter: Thanks, Emma. It’s gonna be really interesting to see how those funds fair over the coming months.

You’re listening to Switch Your Money On from Hargreaves Lansdown and, to end this episode, we have a quick brain teaser – because we’ve been looking at all things tax related. So, I thought I should take you back to the dim and distant past of weird tax history! Are you ready for this, Sarah?!

Sarah Coles: Always [laughs]!

Susannah Streeter: So, back in 1698, Peter I of Russia introduced an unusual tax to encourage the country towards feeling more part of modern Europe, but can you guess what he taxed?

Sarah Coles: Oh, that’s a big left-field, that one [laughs]! Do you know, I know nothing about this period of history – can I have a clue?

Susannah Streeter: I thought you might say that, so I prepared three choices for you. So, here we go – was it Vodka? Was it calling your son Ivan? Or was it beards?

Sarah Coles: [Laughs] I’d love it to be calling your son Ivan! – but, out of all those things, I think the thing that we’ve got a long history of taxing is alcohol, so I’m gonna go with Vodka.

Susannah Streeter: No – it was beards!

Sarah Coles: [Laughs]

Susannah Streeter: It was – although maybe they should have gone for that because – despite the Tsar allegedly promoting his new idea by forcibly shaving guests at a party [laughs]! – it ultimately fell flat, as not much money was actually collected, even though most people preferred to keep their beards.

Sarah Coles: Some people call inheritance tax ‘The voluntary tax’ because they ways you can avoid it, but this is an even better example.

Susannah Streeter: [Laughs] It certainly is!

That’s all from us this time – but, before we go, we do need to remind you that this was recorded on November 27 2023 and all information was correct at the time of recording.

Sarah Coles: Nothing in this podcast is personal advice – you should seek advice if you’re not sure what’s right for you. Investments rise and fall in value, so you could get back less than you invest, and past performance is not a guide to the future.

Susannah Streeter: Yes – this is not advice or recommendation to buy, sell, or hold any investment. No view is given on the present or future value – or price of any investment – and investors should form their own view on any proposed investment.

Sarah Coles: And this hasn’t been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.

Susannah Streeter: Non-independent research is not subject to FCA rules prohibiting dealing ahead of research. However, HL has put controls in place – including dealing restrictions, physical and information barriers – to manage potential conflicts of interest presented by such dealing.

Sarah Coles: You can see our full, non-independent research disclosure on our website for more information. So, all that’s left is for me to thank our guests – Anne, Helen, Sophie, Emma, and our Producer, Elizabeth Hotson.

Susannah Streeter: Thanks very much for listening. We’ll be back again soon – goodbye!