Liz Truss has been named the UK’s new Prime Minister. And whilst the vast majority of the country didn’t get to vote on the decision, households across the country will want to know how the new boss in Number 10 will affect their finances. She has an avalanche of issues to deal with as she takes office - with sky high inflation and unmanageable energy bills threatening to blow a hole in individuals’ budgets.
The bulk of Conservative party members skew older, so Liz has been keen to stress her support for pensioners. However, with the current economic climate, those still saving for retirement are being forced to cut back on pension contributions, or stop altogether. Liz has pledged to lay out her plans to tackle the rising cost of living within her first week in office.
Here is what we already know about the new Prime Minister’s tax and spending intentions.
Liz Truss on pension plans
State Pension protection
Liz Truss has promised no changes to the triple lock - that the State Pension will once again rise by earnings, inflation or 2.5% whichever is higher, every year. After last year’s switch to a double lock, pensioners were concerned the move would be made permanent. But with a new government in charge, this looks not to be the case.
With inflation at record highs, those in receipt of the State Pension are in line for bumper increases to their incomes. September’s inflation figure will be the one to look out for, with the Bank of England predicting a peak of 13% at some point later this year. At that rate, the basic State Pension would rise by £18.45 to £160.30 per week (£8,335.60 per year) in April 2023. The new State Pension would increase by £24.10 to £209.25 per week (£10,881 per year).
Annuity rates up
Annuity rates could rise under a Liz Truss Premiership. An annuity is a regular yearly payment you can buy in exchange for some or all of your pension pot. The annuity rate is how much an annuity will pay out each year. Annuity rates are linked to what’s called the yield on government bonds, also known as gilts. Higher interest rates mean higher gilt yields, and higher annuity rates.
Market watchers predict Liz Truss’s tax and spending plans will keep inflation high and put further pressure on the Bank of England to raise interest rates to try to bring inflation down. The Bank of England has already raised interest rates several times this year, and this has led to higher annuity rates. Annuity rates are still low by historical standards, however. It’s worth noting that when buying an annuity, this can’t be reversed so it’s important to think carefully if it’s right for you before doing so.
Pension transfers down
Defined benefit pension transfer values could fall with Liz as PM. This too relies on predictions that inflation will be sent higher by Liz’s tax and spending plans, forcing long-term interest rates (set by market expectations more than the Bank of England) to rise. A defined benefit transfer value is the lump sum you get for leaving a defined benefit pension scheme instead of staying in and receiving regular payments.
Transfer values are linked to government bond, or gilt, yields. When interest rates and inflation are low, gilt yields are low, and pension transfer values increase. But when there’s a belief higher inflation is on the horizon, like now, and interest rates and bond yields rise, pension transfer values fall so you get a smaller lump sum.
If you’re considering a pension transfer, you’ll need to get advice from a qualified pension transfer specialist if your pot is worth more than £30,000.
Liz Truss on taxes
National Insurance cut
Liz has signalled she would reverse the 1.5% National Insurance hike that was introduced this April to help pay for spiralling care costs in the future, to instead help ease the cost of living crisis happening now. If this goes ahead workers will find a bit more in their pay packets, which could persuade those thinking about opting out to stay in their company pension scheme (a smart move).
But Liz will need a new plan to deal with the cost of caring for Britain’s ageing population.
A potential cut to VAT from 20% to 15% is another plan to help individuals struggling with the cost of living. Some experts have warned it could add further to inflation, however, adding, rather than easing, the burden on people struggling with higher prices.
Inheritance tax review
Liz Truss has pledged a review of the current tax system, which includes inheritance tax (IHT). Nothing specific has been promised here yet, just the potential for more tax cuts further down the line.
Any changes to IHT rules would likely take some time to put in place, but be prepared to make changes to your financial plans if IHT rules improve in your favour.
Key pensions points
- State pension triple lock will remain in place
- Annuity rates could rise further
- Defined benefit pension transfer values could fall
Laura Miller is a freelance financial journalist.
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.