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Issue 70 - Bank Failures, Budgets and Political Pantomime!

6th April is the start of the new tax year in the UK and from this date, we will see the impact of the recent Budget coming home to roost in the form of a freezing of allowances for personal Income Tax, a reduction in Capital Gains Tax allowances and an increase in Corporation Tax from 19% to 25%. 

On the flip side, for those receiving State Pension Benefits, these are due to increase this month by 10% and as always, there are opposing thoughts as to whether each or any of these measures are appropriate or if in fact, there is more political motivation than any other.

Talking of politics, the recent Budget also suspended the lifetime allowance, which is the cap on the amount that can be held by individuals in pension funds, with an announcement that with effect from next tax year, the lifetime allowance will be scrapped altogether.  This was quickly followed within 24 hours by a statement from the Labour Party to say that in the event that they come to power, they will immediately reverse this and reintroduce the lifetime allowance once more.  As the polls currently suggest that the Labour Party will form the next Government, I think we have to view the current suspension of the lifetime allowance as a potentially temporary measure although I do think that on reflection, the Labour Party might well review their initial statement as being premature and in fact, the reintroduction may not occur.  Arguably, this creates a planning opportunity for those concerned during the current tax year, but of course, it has no impact for the majority of people.

More of a concern is the reduction of the Capital Gain Tax allowance for individuals from £12,300 down to £6,000 in this tax year, with a further reduction to £3,000 next tax year.  This change will potentially impact on many more people and places more emphasis on the need to hold investments where possible, in tax protected environments, such as ISAs (Individual Savings Accounts), pensions and life insurance Bonds, as all of these are exempt from Capital Gains Tax.

For people with direct portfolios of Stocks and Shares and those who use collective investment funds outside tax protected wrappers, more care is going to be needed to avoid unwittingly crystalising Capital Gains Tax assessable transactions.  Arguably, this could be a good time to review investments to determine whether recent market volatility has created any losses that could be crystalised and used against any other gains, with a view to restructuring investments.  Early in the tax year is a good time to consider this.

Market Opportunities

Since the beginning of 2022, we’ve seen quite a rollercoaster in global Stock Markets and for most of last year, the traditional safe havens of the Bond market (Government debt like UK Gilts and US Treasuries), underperformed every bit as much as the Stock Markets, with similar reductions in values.  However, during the last 6 months. We’ve seen that position reversing and the Bond market once more provides a safe haven for Investment Managers to include in portfolios.

During the last quarter of 2022, we saw improvements in Stock Markets, which spilled over into the beginning of this year, only to be tempered by more recent volatility.

The most recent jitters were caused by Bank failures, initially with the collapse of Silicon Valley Bank in the US followed very rapidly by the forced takeover of Credit Suisse by UBS.  There was a concern of contagion in the banking sector, but central Banks and commentators were quick to point out that the failures with both Silicon Valley and Credit Suisse were largely driven by poor management and bad investment decisions, rather than a collapse of the banking sector in general.

Some commentators were writing that it was an over aggressive interest rate policy from Central Banks, that will continue to be aggressive until things start to break, were the root cause for both Silicon valley and Credit Suisse, but whilst this might have been a contributory factor, it was not the main reason.

Whilst there could still be some Bank failures going forwards, it is likely that the main Banks will benefit significantly from the increasing interest rates that are passed on to borrowers quickly, whilst the same is not true for savers and therefore, the Bank margins will widen, returning some to profitability that has not been seen arguably, for the last 15 years.

The expectation is that the rate of interest rate increases will slow and stop, probably at some time during or towards the end of this year, and that the rate of global inflation will continue to fall, albeit that it will not fall as rapidly as some would expect, with some forecasters saying that we will be back to the 2% or 3% inflation targets that Central Banks want by the end of this year or early 2024.

As always, it’s difficult to predict when these cycles may peak and reverse, but the general consensus is that inflation has already peaked, and the rate of inflation should fall away quite rapidly this year.  Markets will be watching both this and the Bank interest rate policy closely to try to judge when the pivotal point comes and in reality, we are likely to see increasing market values long before we see the improvements in economic figures.  The general consensus therefore is that over the next 2 or 3 years and beyond, we are likely to see a return to sustained market growth, but as always, there is the potential for disruptors along the way.

Attached Articles from TAM Asset Management

You will see that I am attaching 2 articles recently published by TAM Asset Management, one of which is looking at the banking situation and the second one is looking at the impact of the recent UK Budget.  I think both of these articles have been written in a way that avoids too much jargon and thought therefore, that you might find them of interest.

Political Pantomimes and a Name from the Past

Once again, we are being ‘entertained’ by senior political figures on both sides of the Atlantic.

Most recently, we saw the public hearing in relation to party-gate and the investigation into Boris Johnson, but to date, no official verdict on the actions of Boris have been made just yet and so the investigation goes on.

Across the pond this week, we have seen the arrest of former President Donald Trump, with his hearing in New York on Tuesday of this week, which led to him being criminally charged, but he has pleaded not guilty to 34 charges of falsifying business records. 

Only time will tell how each of these events roll out and whether Mr Trump will be able to turn these events to his political advantage, with his aspirations to return to the White House next year.

In the last few days, we have also had the news that former Chancellor of the Exchequer Nigel Lawson, has died at the age of 91.  For many years (before their falling out), he was considered to have been the main architect of Margaret Thatcher’s economic reforms and whether you agreed with his politics or not, he was an old school politician and Member of Parliament for Blaby from 1974 – 1992.  His other claim to fame is that he has a rather well known daughter!

Easter Greetings

Leaving all the political and financial considerations behind, I just want to close by conveying our very best wishes for the Easter weekend and let’s hope that we can enjoy a little Spring weather!

With best wishes from all at Alexander Bates Campbell

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