Q2 2023 Market Update

Following the market dip in March 2023, caused by concerns in the banking sector, markets have shown a very welcome, steady recovery and regained much of the lost ground. Although UK economic news continues to be downbeat, that isn’t to say there’s no good news. Read on to get the full lowdown on the good, the bad, and the ugly in your latest Platinum update.

In this edition, read expert insight into:

• Good news for retirees, some of whom are experiencing not one but two income increases
• Bad news as inflation falls more slowly than previously predicted
• Ugly news for mortgage holders with increased borrowing costs as interest rate rises

The good: Retirees enjoy a 10.1% increase in the State Pension

Since the start of the new tax year on 6 April 2023, those in receipt of the State Pension have been enjoying a 10.1% boost to their monthly pension income.

The triple lock, introduced in 2010, was intended to help prevent the State Pension from losing value in real terms. But it was temporarily suspended as the Covid pandemic led to distorted average wage figures.

In effect, this guarantee means that each year the State Pension increases by the greatest of the following three measures:

• Average earnings
• Prices, as measured by the Consumer Prices Index (CPI)
• 2.5%

Accordingly, in November 2022, the government confirmed that the State Pension would increase by 10.1% – in line with September’s measure of inflation.

So, thanks to the pension triple lock, the State Pension is now worth:

• £203.85 a week (up from £185.15) for the full, new flat-rate State Pension (for those who reached State Pension Age after April 2016)
• £156.20 a week (up from £141.85) for the full, old basic State Pension (for those who reached State Pension Age before April 2016).

Members of public sector pension schemes enjoy another income rise

Like the State Pension triple lock, public sector pension scheme rules mean that retirees belonging to such schemes are protected from rising prices. Their pension income is increased every April by the rate of inflation recorded the previous September.   As a result, retired public sector workers with defined benefit (DB) pensions also saw a 10.1% increase in payments from 6 April 2023.

The bad: Inflation is stuck and remains elevated at 8.7%  

Although the BoE has a target inflation rate of 2%, the current rate of 8.7% is still four times higher than this. For much of the last year, the rate has been in double digits. While an inflation rate of 8.7% is significantly reduced from the peak of 11.1% in October 2022, there’s still some distance to go before it reaches the official 2% target.

We recently shared an article about current inflation and rising interest rates and what this means for your money. We will continue to update you on this through our regular communications so that you can remain informed about what’s happening in the economy and what it means for your personal finances.

The ugly: Borrowing costs reach their highest level since April 2008 as the Bank of England base rate reaches 5% 

On 22 June 2023, the Bank of England (BoE) raised the base interest rate by half a point, bringing the benchmark rate to 5%. The latest hike is the 13th consecutive interest rate rise the base rate has seen since December 2021, and is at the highest level since April 2008.

The reason behind these successive rate rises is that the base rate is the main tool the BoE can use to help combat inflation. Typically, higher interest rates mean people tend to spend less on goods and services, which helps to balance out consumer demand and slow down inflation.

While higher interest rates represent good news for savers, more than a million mortgage holders could lose up to 20% of their disposable income in the face of rising repayments. There is increasing pressure on the government to step in and support struggling homeowners.

Some Conservative MPs have called for the return of a Thatcher-era tax break and hope to see some relief on mortgage interest. Meanwhile, the Liberal Democrats have called to reverse tax on banks to provide a £3 billion fund to protect those struggling to meet their mortgage repayments.

So far, the government is taking a hands-off approach, ruling out support and insisting that doing so would prolong inflation and defeat the purpose of interest rate hikes.

Whilst it is fair to say that the UK economic news has been dominated by high borrowing costs and the negative effects of high inflation and interest rates, there has been some good news for a number of clients, particularly those who can enjoy their increase in state pension and make the most of their retirement.

We’re here to help

As financial planners, we’ve helped clients weather many economic storms over the years, and that’s something my team and I are proud to continue doing.

Markets may rise and fall, but your investment goals should remain the same, and it’s our job to help you achieve them. For almost 20 years, clients like you have trusted us to provide honest, independent advice in a friendly and professional way.

If you have any queries about anything you’ve read in this update, please don’t hesitate to contact your financial adviser, who’ll be happy to give you all the support you need.

Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

All contents are based on our understanding of HMRC legislation, which is subject to change.