economic #aGENda 21.09

Our regular roundup of financial news from the last two weeks that's driving the economy

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State pension on track to rise 10%

The state pension is on course to top £10,000 a year if the Government keeps its promise to reinstate the 'triple lock' on annual increases.

The popular guarantee means the state pension is raised by the highest of inflation, wages growth or 2.5% - but it was ditched last year because the pandemic temporarily skewed the earnings figure.

The inflation rate will be highest this year, so the state pension increase should be decided by the September CPI figure, which is due out on 19 October. Inflation in August, published last week, was running at 9.9%, down from 10.1%. The latest earnings growth figure, based on total pay including bonuses, was 5.5%.

But older people waiting anxiously to find out what state pension increase they will get next April might find it still lags behind prices. Inflation could stick at around 10 per cent during the key month of September, but rise further this winter despite the Government's freeze on the energy price cap.

Last year, the triple lock was suspended because wage rises were distorted as the labour market recovered from the impact of Covid-19. But this year, sky high inflation is taking a severe toll on pensioners struggling to pay household bills.

If the 9.9% inflation rate from August was used, pensioners on the post-2016 full rate state pension of £185.15 a week or around £9,600 a year would see a rise to £203.50 a week or £10,600 a year.

Those on the old basic rate would see a jump from £141.85 a week or around £7,400 a year to £155.90 or £8,100 a year.

During the Tory leadership campaign, Prime Minister Liz Truss promised to reinstate the triple lock this year but is likely to come under pressure to U-turn due to the squeeze on public finances.

There is overwhelming support for the triple lock among pensioners, though less among younger generations.

Pound slumps to 37 year low

The mammoth economic challenges facing Liz Truss as she takes over as Prime Minister were laid bare earlier this week.

Truss’s election as Tory leader coincided with a top Bank of England official signalling the need for ‘fast and forceful’ interest rate rises in the face of rampant inflation. Catherine Mann, a member of the rate-setting committee, said more aggressive rate rises were needed and did not rule out a 75 percentage-point increase from the Bank of England at the next meeting.*

Soaring energy bills and food prices, spurred by the war in Ukraine, have pushed inflation into double digits and one forecast suggests it could even top 20% in the new year. The Bank of England has responded by hiking interest rates and on Monday Mann backed the idea that forceful monetary tightening is superior to the current gradualist approach. She said: ‘We need to act more forcefully now to ensure that the drift does not become the norm.’

Truss’s victory also came as sterling dipped to as low as $1.1444 against the dollar^, just a fraction above the level seen on March 20, 2020 when markets were gripped with fear over Covid-19 lockdowns. Before that, the pound had not been weaker against the dollar since 1985.

At the start of the week a monthly purchasing managers’ index survey suggested that business activity shrank in August for the first time since lockdowns in February 2021 but there was a glimmer of positivity from separate industry figures showing that retail figures ticked 1% higher last month while new car sales edged up by 1.2%.

Piling further pressure on Truss as she looks for potentially costly solutions to the cost of living crisis is a growing headache over the Government’s £2.4 trillion debt pile. Higher inflation and investors losing confidence have combined to make the cost of servicing that debt higher.

Deutsche Bank said the risk of a balance of payments crisis ‘should not be underestimated’. Shreyas Gopal, a Deutsche strategist, said that with surging inflation, weakening growth, and the possibility of an unfunded spending splurge and changes to the Bank of England’s inflation-targeting mandate, investor confidence could not be taken for granted.

* UPDATE 22 SEP: As it turned out, the increase was only 0.5% to 2.25%

^ UPDATE 23 SEP: As at today it is currently $1.10

Tax traps to avoid for over 65s returning to work

Labour market data from the Office for National Statistics (ONS) this week, suggested over-65s are returning to work in large numbers. They may be looking to keep occupied or bolster their finances further - but regardless of the reason behind their decision, there are important implications to bear in mind.

Specifically, the consequences of returning to work relate directly to the pension a person may have been ploughing their cash into for hopes of a comfortable retirement.

Experts suggest there may be a possible “pension taxation trap” for Britons who are returning to work to consider.

For those who do return to work, care must be taken in respect of future pension funding, as they might have triggered the Money Purchase Annual Allowance. This will restrict any future pension funding to £4,000 per tax-year.

It could be an issue if they join their new employer pension scheme as, based upon contribution rates of eight percent, a salary of over £50,000 would result in contributions exceeding £4,000 per tax-year.

The individual would be personally taxed on any excess above £4,000.

The MPAA means the total amount which can be contributed to a person’s pension each tax year on which they will receive tax relief is reduced to £4,000 annually.

Understandably, this could be a shock blow for those who trigger the allowance, substantially reducing their savings potential by 90%.

Four day working week trial is largely positive

A trial underway to find out the impact of a four-day working week in the UK has largely been successful, revealed a survey of those participating in the experiment.

In June this year, 70 companies and more than 3,300 workers agreed to participate in the largest ever four-day working week pilot in the UK. The trial is currently in its fourth month.

So far, a total 88% of respondents to a survey on the trial stated that the four-day week was working well for them, reported AFP. The chief executive at Trio Media, a participant in the trial, added that “productivity has remained high, with an increase in wellness for the team, along with our business performing 44 per cent better financially”.

Other companies taking part in the trial are from a wide range of sectors, including banking, care, online retail, IT software training, housing, animation studios, hospitality, and more.

According to reports, researchers are also working with each participating organisation to measure the impact on productivity in the business and wellbeing of its workers, as well as the impact on the environment and gender equality.

The government-backed, four-day-week trials are also due to begin later this year in Spain and Scotland.

However, working from home just got more expensive.

People working from home could be set to fork out an extra £131 a month on fuel bills, when the price cap rises in October.

The pandemic saw a societal shift towards home-working, but could soaring energy prices see people return in masse to offices in a bid to keep down costs?

Employees have been advised to weigh up the price of their commute against the rising cost of energy from October 1, with those paying less than £30 a week for travel possibly better off going into the office to save money, says Uswitch.

A spokesman for the price comparison and switching site said: “For workers who don’t have an expensive commute, working from the office is likely to be more economical this winter.”

A typical household will run up a £363 monthly bill for gas and electricity under Ofgem’s new £3,549 price cap, for the three months from October 1. But full-time workers are estimated to increase their daily gas use by 75%, based on them having the heating on for an extra 10 hours a day during the coldest months.

Meanwhile electricity use is predicted to rise by 25% as they cook meals and prepare cups of tea at home. Larger households with higher energy consumption are likely to pay £513 a month, rising to £698 for those working from home. These households could save money if their total weekly commuting costs add up to less than £46, Uswitch calculated.

Those living smaller homes like flats are likely to pay £243 on average a month for energy, rising to £330 if they work from home. These householders are unlikely to find it cheaper to work from home unless their commuting costs are more than £20 a week.

Latest predictions suggest the price cap is predicted to rise further in January to £5,386, meaning that the average household will be paying £580 a month for their energy, compared with £789 for those who are working from home. In that situation, only those paying £49 or more to commute each week would find it cheaper to work from home. The difference is even greater for larger homes that use more energy, with an average January bill of £861 rising by £310 for home-workers to £1,171 a month.

Mortgage shock looms as interest rates rise

Homeowners will have breathed a sigh of relief last week when the government finally announced a policy to prevent energy bills skyrocketing, but the cost-of-living crisis is far from over.

The next thing to worry about is your mortgage.

The historic low loan deals that buyers were blessed with for the past 12 years have been swept away by six Bank of England base rate rises so far this year.

In 2020 you could fix your mortgage for two years at an average rate of 2.24%, according to comparison site Moneyfacts. The best buys were far lower – less than 1% in many cases. Now the average two-year fix is 4.09%.

On a £500,000 25-year mortgage that will mean your monthly repayments rise by almost £500. In fact, if you can remortgage now, you can count yourself lucky – it may be far, far worse next year.

Analysts expect the Bank Rate to climb further – to 3% next year.

The average rate on a two-year fixed deal for a buyer with a 25% deposit would then jump to 4.88. This would be four times the rate at the end of 2021.

So, what can you do to prepare yourself? If you can remortgage, now is the time to do it.

Rates are still going up, so locking in now will save you money. Even if your current deal doesn’t end for some time, you can shop around for a mortgage now.

Most mortgage offers are valid for six months so you could be approved for a lower-rate deal now than you will be able to get in a few months’ time.

If you can afford to, consider overpaying your mortgage. Borrowers who are still enjoying a low mortgage interest rate can overpay now to help erode their balance more quickly and leave them with a smaller mortgage when their current deal ends.

When it is time to remortgage, you could lengthen your mortgage term to lower your monthly repayments. For example, a £200,000 mortgage at 3% would cost £948 a month on a 25-year-term or £843 over 30 years. Just remember, the longer it takes you to repay your mortgage debt, the more interest you will pay.