Interactive Investor

The big personal finance events in 2023 and how they will impact you

From inflation and house prices to major pension reforms, Craig Rickman rounds up the year’s dominant personal finance themes.

29th December 2023 10:14

Craig Rickman from interactive investor

As we say goodbye to 2023 and give a warm welcome to 2024, it makes sense to recap the big events that have impacted our finances over the past 12 months.

Some of 2022’s leading themes, most notably inflation and interest rates, continued to hog the headlines.

Elsewhere, the two set-piece fiscal events - the Spring Budget, and the Autumn Statement - brought (potentially) seismic changes to the pension landscape, while the housing market’s remarkable run came to a grinding halt and the Santa rally gave stock markets a shot in the arm.

Let’s round up what’s been going in 2023 and examine how it’s affected your money.

Inflation eases and interest rates pause

It was very much a tale of two halves for inflation. The first part of the year price rises proved more stubborn than many had expected - and indeed hoped. The UK consumer prices index (CPI) nudged back up to 10.4% in February, much to everyone’s surprise.

At the mid-way point of 2023, Prime Minister Rishi Sunak’s pledge to halve inflation by the end of the year looked a touch ambitious, with CPI sitting at 7.9% in June.

Price rises remained sticky throughout the summer, but as the colder months moved in, the wheels finally began to turn.

Between September and November, CPI plummeted from 6.7% to 3.9%, thanks in part to higher energy prices dropping off the annual figures.

It was a similar story for interest rates.

After starting the year at 3.5%, interest rates rose five times throughout 2023 to reach a 15-year peak of 5.25% in August; an unprecedented run of 14 consecutive hikes. Some commentators and experts predicted further increases as inflation remained difficult to tame.

But these forecasts did not come to pass. August’s hike was the last of the most aggressive rate-hiking cycle in modern history, as the Bank’s Monetary Policy Committee (MPC) kept rates on hold at its final three meetings in 2023. Interest rates will close the year at 5.25%.

The decision to pause rates brought welcome relief to borrowers who were seeing mortgage repayments soar; particularly those on variable rates or with cheaper fixed-rate deals coming to an end.

On the flip side, higher interest rates enabled you to enjoy the best returns on cash savings for 15 years, with NS&I’s one-year fixed bonds, which paid 6.2% a year, a noteworthy mention.

Looking ahead, with inflation now falling to a more respectable level, rate cuts are now zooming into focus, and could even arrive early in the new year. Before we get too carried away, the Bank doesn’t expect inflation to ease to its 2% target until early 2025.

Pension landscape shake-up

At the start of the year there was little to suggest pensions would be the subject of monumental reform. The pension rumour mill is constantly spinning, but it’s been nine years since the retirement landscape was given a good shake-up.

But seismic changes finally arrived in 2023, at both the Spring Budget and the Autumn Statement.

At the former fiscal event, Chancellor Jeremy Hunt caught everyone off guard by announcing the pensions lifetime allowance (LTA) will be abolished. This means you can now save and invest for your retirement without fear of being hit with a tax charge of up to 55% - great news.

There was, however, a sting in the tail. The maximum tax-free lump sum is now capped at £268,275 – 25% of the previous £1.07 million LTA.

In a further move to benefit savers, the government also shook up the annual pension thresholds. From April 2023, the annual allowance - the amount you can save into a pension every year and get tax relief - upticked from £40,000 to £60,000.

In addition, with the tapered and money purchase annual allowances both increasing from £4,000 to £10,000, retirees and high earners now have more scope to pay into a pension and get tax relief.

Meanwhile, at the Autumn Statement, Hunt revealed the government will consult to allow savers a “pension pot for life” – a potentially groundbreaking reform to the workplace pension landscape. In practice, this would permit you to ask your employer to pay into a pension scheme of your choice, removing the need to accumulate several pensions throughout your working life.

This project, however, is still in the earliest of stages. There’s no guarantee the government will push “pot for life” through, and even if given the green light it could be some time before it becomes a reality.

National Insurance cuts

Sticking with the Autumn Statement, another eye-catching policy at November’s event was the cuts to national insurance contributions (NICs), largely benefitting lower-to-middle earners.

Both employed and self-employed workers will pay lower NICs next year, providing a much-needed boost to pay packets and profit margins.

First, the main rate of employee Class 1 National Insurance (NI) will drop from 12% to 10% from 6 January, with 27 million workers set to benefit.

Second, Class 2 NICs – a flat-rate paid by self-employed workers - are being abolished, while Class 4 NICs - paid on self-employed profits - will reduce from 9% to 8%. Both changes will take effect from April.

ISA reforms

While the chancellor didn’t mention changes to individual savings accounts (ISA) in his Autumn Statement speech, some tweaks to simplify the current landscape were found lurking in the red pages.  

The main one is that the government will allow multiple subscriptions to ISAs of the same type from April this year. Other changes include: two new investment options allowable in the Innovative Finance ISA, the inclusion of certain fractional shares, the removal of the requirement to reapply for an existing ISA every year and equalising the account opening age for adult ISAs to age 18.

For a more in-depth analysis of these reforms, check out this article by ii’s Kyle Caldwell.

Property market cools

After witnessing searing growth between 2020 and 2022, the housing market cooled in 2023. According to Zoopla, the property website and app, the average UK house price fell 1.1% this year (£2,990 in pounds and pence) to £264,500. Once you factor in inflation, real term falls have been even greater.

The main driver here is interest rate rises, which have propelled mortgage deals upwards. With borrowing costs now far more expensive that than they were before the Bank started jacking the base up in December 2021, buyer affordability has been choked. The resulting reduced demand has subdued property prices.

The outlook for next year is equally muted, due to a somewhat bleak economic outlook. Mortgage rates may continue to fall in 2024, and these drops will accelerate once the Bank starts to reduce interest rates. But analysts expect house prices to remain stagnant next year and might even drop 5%.

Stock markets fare better than expected

After experiencing a rough ride in 2022, global stock markets rebounded this year; on track for their best annual performance since 2019. But there was some turbulence along the way, particularly on these shores.

The FTSE 100 hit a record high in February, breaching the 8,000-point mark for the first time. However, the UK main market sank below 7,400 points just a few weeks later and yo-yoed as the year played out. Things have ended on an encouraging note, though, with the so-called Santa rally pushing the FTSE marginally higher than where it started the year, offering some green shoots as we head into 2024.

Other global markets fared a lot better. Standouts include the S&P 500, which has climbed 25% this year at the time of writing, propelled by the performance of tech giants such as Alphabet, Amazon, Apple, Microsoft, and Meta.

In other parts of the world, the Nikkei 225, Japan’s main market, has soared a mammoth 30% in 2023, again at the time of writing, and looks set to close the year at around 33,500 points.

Silicon Valley Bank collapse

It would remiss not to mention the plight of Silicon Valley Bank (SVB). In March 2023, the $212 billion tech lender collapsed after customers pulled their cash in response to solvency concerns, reportedly triggered by aggressive interest rate hikes. SVB was the largest US bank to go under since the 2008 global financial crisis.

However, this event did not deter the US Federal Reserve from continuing to tighten monetary policy, as interest rates were hiked in March, May, and July as US rates hit a 22-year high.

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