Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
Even in the breakneck timeline of Coronavirus, it’s possible to identify distinct phases in the crisis and how we all think about it.
In the initial phase there was deep shock, understandable fear about the health consequences of the illness and panic in financial markets. These themes persist to varying degrees but have now been joined in a new phase by concerns about the human consequences of a deep recession in the economy, the need for lockdowns to be lifted to protect livelihoods and discussions about what life in the medium term will look like as the world seeks a way to live with the virus until it can be managed properly.
And at some point soon, when we have clearer answers to those questions, minds will eventually turn to the long-term changes that are necessary in the post-Corona world, and of how the financial burden of supporting economies in these dark days should be shared in the future. There are signs even now of how that discussion will shape up.
The first clue came three weeks ago when the Chancellor Rishi Sunak produced support measures for the self-employed. This group is unable to access the scheme for employed workers that will fund 80% of their wages up to £2,500 a month. A comparable scheme for those working for themselves was unveiled with support based on their average profits over three years, and with the most profitable excluded.
But the help came with a warning that the tax treatment of the self-employed may have to change in the future. The Chancellor said: “It is much harder to justify the inconsistent contributions of people with different employment statuses. If we all want to benefit equally from state support, we must all pay in equally.”
That was taken to mean that the lower National Insurance contributions that self-employed people make will at some point be equalised with those of employees. It’s a change that has been mulled and resisted before, but the crisis perhaps gives the Government cover for a tax hike.
And today there are renewed calls for the Government to end the ‘Triple lock’ for pensions - the mechanism that ensures the State Pension rises by at least the rise in inflation, the rise in wages or 2.5%. If, as seems reasonable, a recession leads to lower wage rises for workers, and inflation remains below target, the Triple Lock would mean the State Pension rising significantly above the pay of workers and prices. Pensioners would be richer in real terms at a time when those working and contributing to the recovery are being squeezed.
Even if the Government and markets accept the need for much higher state borrowing in the future, tax increases and spending cuts like these seem likely. What else could be on the table?
Pension tax relief was already in the crosshairs prior to the Coronavirus outbreak and it is likely to be once again be raised as an area where the Treasury could claw back money. Raising Income Tax is politically toxic but even this could come into play if the Government believes such a move would be supported by a public still rallying around the flag.
Whatever changes do come, it makes sense to make the most of the current tax regime while it lasts. Maximise the help you get from the tax man inside ISAs and SIPPs if you can to ensure what you save now remains tax-free in the future.
Important information: Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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