Rishi Sunak launches another round of help for the cost-of-living crisis
Chancellor Rishi Sunak has announced a fresh round of financial help for households facing ever-mounting living costs as inflation rises.
Sunak announced a raft of measures to help raise money and doled much of it out to households in varying amounts. It comes in the wake of an announcement a few days before from energy regulator, Ofgem, that the cap on average energy bills could rise to £2,800 per annum in the Autumn.
The package of measures has drawn criticisms at both ends with the Labour Party accusing the Chancellor of not doing enough for households, while economists have been questioning the wisdom of pouring more money into households’ pockets while inflation soars, and the Bank of England raises rates to attempt to slow spending.
But not all households are receiving equivalent amounts. So, what do the measures contain?
(Not a) windfall tax
The main tax-raising measure that the Chancellor has announced in order to fund measures for households is by taxing oil & gas and energy firms for the extraordinary profits they’ve received as a result of high energy prices.
The tax has been dubbed a ‘windfall tax’ in the media, but in practice is going by another name. Firms such as BP, Shell and British Gas owner Centrica will see a temporary 25% “Energy Profits Levy” imposed on their profits. This will increase their overall tax rate to 65% of profits, a combination of corporation tax and other levies they already pay.
The Chancellor says the measure will raise around £5 billion in the first year, but firms will be able to offset 91p for every £1 of their obligations if they invest in the UK’s energy infrastructure, a significant incentive.
Help for households
At the other end of the announcement – Sunak has announced significant help for households to pay for rising bills.
The core of this plan is a £400 grant which every household will receive in the Autumn. This replaces a previously launched £200 loan which was set to be paid back through higher energy bills in the future.
The grant will be paid out automatically to customers who use direct debit or credit payments for their energy bills. Households with prepaid or voucher-aid meters will have it applied to their meter automatically too.
Beyond this, around eight million households which currently receive means-tested benefits will get £650 cost-of-living payments, payable in two instalments in July and the Autumn. Those eligible will get the money automatically and needn’t apply.
Pensioners will also receive a £350 one-off payment, paid automatically. The disabled will also get another £150 one-off payment. Again, neither have to be applied for and will be funded through existing systems.
In total, the package of measures is expected to cost £15 billion – some way higher than what is being raised from the so-called windfall tax. The Government plans to fund the rest of the package through borrowing, but says it is doing so while maintaining fiscal responsibility.
NS&I to hike premium bond rates, but is it the place to put your cash?
With interest rates rising, NS&I has increased the rate on its premium bond prizes.
The rate on premium bond prizes is now equivalent to 1.4%, up from 1%, as of 1 June. With this the number of £100,000 prizes has increased from six to 10, while the number of £50,000 prizes has increased from 11 to 19.
As for the £1 million monthly winners, there will continue to be only two per month.
NS&I premium bonds work on a lottery basis, but with the likelihood of smaller prizes being much higher, the effective rate of return for your money is 1.4% per year – although this is still not guaranteed as it continues to function as a prize draw.
Premium bond or cash savings?
The question now is whether Premium Bonds, which are extremely popular, are worth putting money into or not.
There are two parts to this answer.
Firstly, ask – what is the money for? If you need it in the short term or if it is a rainy-day fund, then it should be kept in cash. You can cash in your premium bonds at any time, meaning they essentially function like an easy-access savings account (albeit without a guaranteed rate).
While you may scoop a £1 million prize, the odds of this are extremely low. You are, generally speaking, better off saving any short-term cash holdings into an actual easy-access savings account.
At the time of writing the best rates on offer come from Virgin Money club M Saver, offering 1.56% or the Chase Saver Account offering 1.5%. Both are easy-access so you can take your money out at any time.
The second part of the answer comes when considering longer-term saving. If the money you are putting away is for the long term, then realistically it needs to be saved through a tax-efficient vehicle such as an ISA or pension, and invested in assets such as stocks, bonds or other investments.
With inflation riding around 8% currently, saving into cash accounts over the long term is not only ineffective, but also actively reduces the value of your wealth. While the stock market has suffered turbulence in 2022, and is never guaranteed to perform, over time it still beats cash equivalents with ease.
Ultimately what matters then is having a cash fund which you can turn to for short-term needs – be that for a rainy day or to use for expenditure in the near future. But anything saved for the future should be invested.
When it comes to premium bonds, it might be a nice idea to hold a few just in case of that big win – but really the vast majority of your money should be elsewhere.
The World In A Week - The Bottom of the Bear?
Written by Cormac Nevin.
After quite a challenging year to date for both equity and fixed income assets, last week saw a strong risk rally. The S&P 500 Index of US Equities led the charge and rallied +5.3% in GBP terms. Global, Continental European and UK Equities also had a good week, while the riskiest forms of fixed income such as high yield bonds also rallied. High-quality global bonds, as measured by the Bloomberg Global Aggregate Index GBP Hedged, also rallied slightly last week.
This is interesting as it illustrates the continuations of a phenomenon that we have witnessed this year as the performance of equities and high-quality treasury bonds have started to move in the same direction as inflation, and higher interest rates prove to be a challenging environment for both. The MSCI All Country World Index of global equities is now down -6.4% for the year in GBP terms while the Bloomberg Global Aggregate Index GBP Hedged is also down -7.3% for the year. Naïve allocations to treasuries and equities have formed the basis of traditional multi-asset investment over the last three decades, and a reversal of the negative correlation between the two variables could have interesting ramifications.
Many of our portfolio components such as specialist global value equities, Chinese government bonds and Absolute Return strategies have generated positive absolute returns this year as equity and fixed income markets fell. Once again this illustrates the importance of a diversified portfolio which goes beyond traditional stocks & bonds, particularly in the changing macroeconomic landscape we currently face.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 30th May 2022.
© 2022 YOU Asset Management. All rights reserved.
The World In A Week - Jubilee celebrations, but will markets have anything to celebrate?
Written by Richard Warne.
Economic fine-tuning is difficult. Markets continue to hope that central bankers will weave a path in terms of controlling inflation, while not having to aggressively increase interest rates, thereby potentially leading to a steady glide path for economies. Of late, there have been many commentators shouting about hard landings and heightened recessionary fears. So far this year, these fears have dominated markets and returns for both equities and bonds have been challenging.
The prevailing question now seems to be “are we there yet”? Have we reached the other side of the market reset? As we sit today sentiment seems very negative, but have these recessionary fears been baked into markets? The Fed in the US has made it abundantly clear that curtailing inflation is their number one goal, but it appears that markets have moved on to absorb expectations for several further rate hikes. This is probably best highlighted by the fact that the yield on the 10-year US treasuries has settled below 3% for some time.
Eurozone inflation came into focus last week, with the Consumer Price Index (CPI) prints being higher than was forecast. Germany’s year-on-year inflation was the highest with a 7.9% increase. The focus here is not on quantitative tightening, as Christine Lagarde, President of the ECB, has already provided colour on this, but whether the first-rate hike will be 50bps. Futures markets are certainly starting to price in this possibility.
Looking ahead, much of this may become a sort of “waiting game” until we see the next meaningful event. The next CPI print in the US is only a week away, with the June Federal Open Market Committee (FOMC) only a few days later. Potentially, a general lapse in headlines might allow for markets to settle into a more subdued pattern. For a data-dependent Fed that everyone has their eyes on, these economic data prints are more important than ever.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 6th June 2022.
© 2022 YOU Asset Management. All rights reserved.