Kieran Ellis, Technical Research Specialist
25 January 2025
Read time: 7 minutes
It feels like we’re at the beginning of a new chapter. The same storylines carry over: Donald Trump, inflation, interest rates and tax rises. But after a turbulent few years, 2025 starts with a fresh page. A promise of greater certainty. Of more stability. With grounds for optimism of recent progress continuing.
The forward-looking nature of markets means they’re often ahead of the public mood. So as much as 2024 had its fair share of unpredictable news events, global shares rallied on what it believes is to come. And that was a boost for investors like you.
- US markets had a great 2024, with the S&P 500 up 23%. When you add in 2023’s strong showing, the S&P 500 has achieved its best two-year performance since 1998 (up 47%).
- Closer to home, the UK FTSE 100 fared less well but still reached a new record high in May. It’s the fourth year in a row the FTSE 100 has posted a positive annual gain.
- The MSCI World Index – which tracks global shares – was up 19.2% for the year.
You can’t invest directly into a stock market index. But your portfolio has investments which are part of these markets, meaning you will have benefitted by them going up in value.
As political commentators and economic analysts argued over 2024’s unfolding events, your portfolio was making you money. Great news of course. But as we like to regularly remind you, it’s your long-term future that really matters.
So, as we navigate our way into 2025 and this new chapter, let’s look at what you need to consider when managing your finances.
First things first, will the good times (for markets) last?
In your latest quarterly report (due to be with you by early February) we talk about how markets had a strong end to 2024. All in all, there is optimism about the path ahead.
Which is all well and good, as long as the things that markets expect to happen actually happen. Can Trump deliver on his economic policy promises? Is the cost of living crisis really over? Can China build on signs of recovery? Will economic growth continue?
In the UK, there are worrying signs of a slowdown in Gross Domestic Product (GDP), which could spark a recession. And we are yet to fully know the impact of Labour’s National Insurance rise for businesses, which takes effect in April.
Meanwhile the strong performance of global shares over 2024 has pushed valuations up, and there are questions over how much further they could climb from here.
The point is there are reasons to guard against expecting markets to repeat their stellar 2024 performance. If everything goes as expected, great. But there are potential rockier times ahead in the short-term.
Don’t panic if that happens. At Skipton Building Society, we’ll be closely watching to see if events provide the substance that justifies the positive market sentiment we saw over 2024. As ever, we’ll share with you what we see.
Interest rates are finally coming down, which could impact your savings
Having remained at a 15-year high for a full 12 months, we saw two UK base rate cuts over the second half of 2024.
Last October, Goldman Sachs was bullishly predicting the Bank of England would cut rates repeatedly in 2025. But a week later, the Autumn Budget happened, containing government plans to borrow and spend billions. This has curbed interest rate expectations.
Rate cut forecasts have been altered but not completely rewritten. Both ING and OECD predict base rate will be 3.25%-3.5% by early 2026. It’s currently at 4.75%. In December, the Bank of England governor Andrew Bailey said, “We think a gradual approach to future interest rate cuts remains right.”
Longer-term interest forecasts suggest base rate will drop to 2% in 2027. And then broadly remain at this level until at least 2029.
This outlook is not such good news for your cash savings. There have been some very good deals for savers in recent years, but this will be less the case in a rate-falling environment.
We always recommend you have savings set aside for just-in-case moments, and for your short-term needs. But if you have other savings earmarked for your long-term future, it might be wise to consider your options.
Making the most of your tax-efficient allowances is more important than ever
Recent tax changes make it more important than ever to use your allowances effectively.
- Back in April 2024, dividend and capital gains tax (CGT) allowances dropped to £500 and £3,000 respectively. The Labour government also increased CGT rates in the Autumn Budget.
- The freeze on income tax thresholds has been extended until 2028, and means potentially higher taxes for many investors.
- However, ISAs and pensions remain useful ways of reducing tax and growing your money.
From 6 April, you’ll have a range of shiny new personal tax allocations to use. From a new £20,000 ISA allowance, to up to £60,000 you can save into a pension (provided you haven’t started accessing your pension).
Before then, it’s worth checking if you’re taking full advantage of your 2024/25 tax opportunities. Your ISA allowance, naturally (you can’t carry it over, so if you don’t use it by 5 April, you will lose it). But your income tax threshold could also be worth considering if you’re withdrawing from your pension.
Beyond the 25% you can take tax-free, the money you withdraw from your pension is treated as income which could be taxed. Taking too much in one tax year could see it taxed up to 40% or 45%. You could withdraw up to £50,270 without paying more than the 20% rate of tax. So, if you’ve taken less than your threshold so far in 2024/25 – and think you might want to access a larger amount in 2025/26 – it might be worth looking into withdrawing from your pot before 6 April.
Tax is complicated. So, if you need any help making sense of your options, get in touch.
Looking further ahead, 2025 could be a good time to think about your legacy
Significant changes to Inheritance Tax are coming. The plan is that – from April 2027 – pensions become part of your estate. Meanwhile agricultural assets (like a farm) worth more than £1 million won’t be exempt after April 2026 (and will be subject to a 20% tax charge). It all means more people are likely to have an Inheritance Tax liability in the coming years.
Will that include you? We might know a bit more in the coming weeks. The government has undertaken a consultation period into these reforms. We can expect to hear further announcements over the first half of 2025, outlining exactly how the new rules will work.
At this point, it could be worth looking at your plans. There are ways to address a potential Inheritance Tax liability and leave a stronger legacy to your loved ones. This is something where we could support you.
Whatever lies ahead in 2025, we’re here for you
At Skipton, we’re pleased our advice was able to help you grow your investment portfolio over 2024. It was a year that demonstrated the benefits of having long-term financial plans that suit your personal circumstances.
By paying to receive an ongoing service from us, you can be confident we’ll keep supporting you every step of the way. This includes helping you look after your finances in 2025.
- Remember investing is a long-term commitment. There might be the odd bump ahead, but your portfolio has performed well of late and is set up for the long-term.
- Interest rates are likely to keep coming down, so don’t ignore the impact it might have on your cash savings.
- Some tax rules have changed, some haven’t. We can help you make the most of the opportunities to pay less tax on your investment returns – both this tax year and next.
- There are ways to protect your loved ones’ legacy and we’re here if you need us.
Whatever lies ahead in 2025, we’re right here to help you write this next chapter of your financial journey.
Past performance is not a guide to future returns. Past economic and market conditions experienced may not be repeated in the future. The tax treatment of savings, investments, pensions depends on personal circumstances. Tax rules may change in the future.
The Financial Conduct Authority doesn't regulate Trust planning and most forms of Inheritance Tax planning.
The opinions and analysis provided are for information only and do not constitute financial advice.