The Budget rumours that can lead to own-goals: Sarah Coles

Anyone who was worried that the end of the World Cup left them with nothing to agonise over can rest easy, because Budget speculation season has kicked off. It’s an annual phenomenon that has almost come to feel like the new national sport. However, this isn’t just a game, because panicking about rumours can lead people into some horrible own goals.

At this stage, rumour-mongers are just warming up. They’ve got until 28 October to really get into their stride. Yet they’re already discussing how taxes could be raised to pay for social care, plus the cost-of-living measures and the business rates cut that have already been announced. The new leadership seem more prepared to stamp out some speculation – making it clear that council tax and stamp duty won’t be in the frame this time round - but it still gives commentators plenty to go on.

So far, pensions haven’t entered the frame, and it needs to stay that way. We know from previous years just how much damage people can do to their finances if they feel forced into decisions around pensions. Ahead of both the 2024 and 2025 Budgets, widespread speculation about possible reform to ‘tax-free cash’ on pensions persuaded people to raid their pots. In 2024/25 an estimated £10 billion may have been taken out of pensions for no reason other than panic.

If this money is withdrawn purely because of worry, there’s a risk it comes out of a tax-efficient environment, misses out on investment growth, and is eroded by tax, inflation and incidental spending. FCA research showed 17% of people moved the money into savings accounts for everyday expenses, and 23% did so as rainy day savings. The Department for Work and Pensions has calculated that 14.6 million people aren’t saving enough for retirement, but that if people take their lump sum out and spend it, this rises to 16.2 million.

This doesn’t mean you have to sit and wait for the Budget to hit you like a bolt from the blue, because there are a few things you can do to protect yourself from potential changes, which won’t backfire if those changes fail to materialise.

If you have any investments outside ISAs or pensions, you can protect them from existing taxes – as well as any potential changes – by moving them into a Stocks and Shares ISA. Meanwhile, if you’re starting out with investments, or topping them up, Stocks and Shares ISAs should be your first port of call.

If you have savings, you can open a Cash ISA to protect them from the looming 2% hike in tax on savings interest from April. You can take advantage of as much of your Cash ISA allowance as makes sense, before it drops to £12,000 for the under 65s.

Meanwhile, making extra pension contributions is a brilliant way to cut your income tax bill, while building your resilience later in life. It also helps protect you from the impact of frozen tax thresholds. If a pay rise has pushed you over a frozen income tax threshold, upping pension contributions may bring you back down below it. You can also take advantage of pension tax relief while you know where you stand.

There’s broader financial planning you can consider too. If you’re married or in a civil partnership, transferring assets between you won’t trigger a tax bill. It means you can share them more equally, and both take advantage of annual allowances for things like dividends and capital gains tax. Plus, you can make the most of two sets of annual pension and ISA allowances, so as much of your portfolio is protected from tax as possible.

If you have children, you could also consider investing for them through Junior ISAs or Junior SIPPs. Think carefully about what you can afford to give away, so you don’t regret losing those assets, but if gifts are affordable, they can save a big chunk of tax, and protect you from the risk of any additional wealth taxes too.

Giving money away to younger family members can also protect you from an inheritance tax bill. No government will want to wade into the inheritance tax debate again without careful consideration of a potential backlash, but even if nothing changes, you could be grateful for the fact you used this opportunity to plan ahead.

The key is not to give away too much, too soon. If you’re not sure what you can afford to part with, it’s worth speaking to a financial adviser, who can assess your finances and model what you’re likely to need, and what you can give away.

There’s no compulsion to do any of this, and there shouldn’t be any pressure to do anything you wouldn’t otherwise be considering. It can help to think of the run-up to the Budget as a handy reminder to check what’s right for you, and take sensible tax saving steps, rather than rush into anything you come to regret.

That way, as Budget speculation ramps up in the coming weeks, you can relax, safe in the knowledge you have already parked the bus on your finances, so you’ve done everything you need to do to protect yourself from tax attacks.

Should I overpay my mortgage or invest?

If you focus on the maths, unless you have a particularly high mortgage rate, this tends to come down in favour of investing. If you have a £250,000 mortgage, with 25 years left to run at 4.5%, you would pay £1,389 per month. If you increased it by £200, you would shave 5 years and one month off your mortgage and save £38,410 in interest.

If you were to put that money into an investment within a Stocks and Shares ISA and made annual growth of 5% after charges, by the same time (19 years and 11 months) you would have £77,100 left to pay on the mortgage. However, you could have built £82,010 in your ISA, so you could pay the debt and still be £4,910 better off.

However, it’s not that simple, because you need to factor in investment risk. If the investments performed poorly and you made an average of 2% a year, when you got to 19 years and 11 months, you’d have £58,760, which wouldn’t be enough to clear the debt.

There are considerations, beyond the maths too. If you overpay the mortgage, you’re giving up flexibility. You’re tying your money up in an illiquid asset, so it’s not available for anything else if you need it. If you invest, by contrast, you can withdraw as much of the money as you need, whenever you need it.

Your circumstances matter too. If you have a hefty mortgage that you’re worried about, an insecure job, health issues, or uncertain family responsibilities, then you may want to clear down the mortgage as quickly as possible.

Essentially there’s no specific right answer, just the answer that’s right for you. In many cases, people opt for a balance of the two – overpaying the mortgage with some of their additional cash and putting some of it into investments. That way you get the best of both worlds.