In Focus - Autumn 2022 (Gated)
Welcome to the latest issue of In Focus, your quarterly financial planning newsletter.
<big>In Focus
<b>Your quarterly financial planning newsletter <br>Autumn 2022</b>
<i>In this issue: </i>
•Inflation - What does it mean and how <br>it affects you
• Five key things to include in your will
• What a cashless UK might mean for pensioners
• How to make the most of the 2022-23 tax year
<big>Welcome
<strong>Welcome to the Autumn 2022 edition of In Focus.
Find out what's in this issue:
Welcome
Welcome to the latest issue of In Focus, your quarterly financial planning newsletter.
In this edition of In Focus, we offer four new articles to inform and inspire your thinking.
We hope you find this content helpful and invite any questions you may have on these topics, or regarding your own financial planning.
Inflation - What does it mean and how it affects you
Inflation - What does it mean and how it affects you
The Consumer Price Index (CPI) for July hit 10.1%; bringing UK inflation to a 40-year high (August’s figure remained almost as high, at 9.9%). Worryingly, this is five times the target for the Bank of England (BoE), and forecasts suggest that inflation could even reach 18.3% in 2023 - the highest rate in half a century - primarily due to higher energy prices, although we need to wait and see what impact the government’s price cap will have. Understandably, people across the UK are worried about what this means for their wealth and finances. Below, we explain what is happening in 2022 with inflation and outline some key implications for your financial plan.
What is inflation? A quick recap
Inflation refers, broadly, to the rising cost of goods and services in an economy over time. Many economists believe that a small amount of inflation can drive economic growth, which is partly why the BoE has an inflation target of 2%. However, if prices rise too quickly in an economy, it can cause problems. Firstly, consumers may struggle to afford essential goods (such as food items and petrol). Secondly, it can lead to higher “input costs” for businesses - such as materials for products - which then eat into their profits. If costs get too high and these cannot be passed down to customers, those businesses may be forced to cut jobs.
The inflation landscape in 2022
What is driving inflation at the moment? Rising average wages in an economy, for instance, can be a culprit as this means people have more money to spend, leading businesses to feel that they can charge more. In 2022, however, this does not appear to be the main factor. Indeed, the evidence largely suggests that wage growth in the UK has not kept up with inflation - leading an average worker £20,000 worse-off, in real terms, since 2008.
Rather, the primary driver in 2022 seems to be rising energy costs. Wholesale prices were rising already in 2021 as countries reopened from COVID-19 lockdowns. Also, Europe and Asia both experienced an especially cold winter - leading to a depletion of gas reserves and high demand to refill them. Since February 2022, however, we have also seen Russia’s invasion of Ukraine - leading to heavy international sanctions on the former, which is a major producer and supplier of oil and gas to global markets. It is expected that the recently announce government plans to cap the energy costs of households will have some impact on reducing inflation, although we need to wait to see the full impact.
How rising energy prices are driving up other prices
Unfortunately, rising energy prices do not just lead to a higher bill at the pump. Supermarkets, for instance, rely on lorries to deliver goods to their shelves. Higher transport costs erode their margins, which then get passed down to consumers in the form of higher prices. According to the ONS, for instance, the average price of an 800g loaf of bread is now £1.24; which is 18p higher than last year. Moreover, plastic goods (e.g. toys and soft drink bottles) are often made using natural gas. Higher gas prices increase the input costs for items such as these, which - again - get passed down to the consumer. Modern cars are also often made using high amounts of plastic. The Tesla Model S, for example, is partly made using petrochemical-based plastic. In short, higher energy costs have a big knock-on effect to consumer spending, overall.
Short-term financial planning implications
Given the harmful effects of high inflation, the BoE is keen to get the CPI rate back down to 2% (“normal” levels). Its primary tool to achieve this raising the base rate, which other UK banks use to set their own interest rates. When the rate goes up, so do theirs. The BoE has raised the base rate six times already since late 2021 to try and control inflation - from an all-time low of 0.10% to 2.25% at the time of writing. However, inflation shows no sign of reversing yet and there are hints that the BoE may be forced to raise the base rate to 4% (or even more) in 2023.
One of the most pressing implications of increasing interest rates is your mortgage. Those on a variable rate will likely see their monthly payments go up. One report suggests that those who took out a 2-year fixed-rate deal in 2020 during the pandemic (when rates were very low) may also be in for a shock when their deal expires in the coming months. The market has shifted a lot due to the higher base rate, with the average 2-year fixed-rate deal now standing at 4.09% interest (in 2020, it was 2.45%). This could add £200 a month, or more, to some homeowners’ mortgage payments. To prepare for possible cost rises in this aspect of your finances, consider reviewing your budget and making sure that you can stay within your means.
Looking to the longer term
Over time, high inflation also degrades the “real value” of your savings and investments. If your portfolio grows 6% in a year but inflation rises by 2%, for instance, then it has grown by 4% in real terms (setting aside other costs and taxes). In 2022, interest rates on regular savings are still low and do not come close to matching inflation. Therefore, whilst it is wise to hold 3-6 months’ worth of emergency savings in an easy-access account, it is generally a bad idea to hold lots of wealth in cash - which will lose value over time.
Instead, consider reviewing your portfolio strategy with your financial planner to ensure that you take advantage of other assets and investments that give you better opportunities to match (or beat) inflation over the long term. Equities, bonds and property investments are all examples that you may consider in light of your financial goals, situation and risk tolerance.
Speak to us here at Punter Southall Aspire if you would like to discuss your position and how to reach your goals.
Five key things to include in your will
Five key things to include in your will
Writing a will is no easy task. Not only do you need to ensure all parts of your estate are accounted for (e.g. savings, property and collectibles), but the language needs to be legally sound to avoid misunderstandings later. However, failing to prepare a will leaves open the possibility that your possessions will be dealt with under the UK’s “intestacy” rules - which may not administer everything in a tax-efficient manner, or distribute your assets in the manner that you would have wanted. Below, we cover five essential steps to take when crafting a will.
Bear in mind that your will should still be updated regularly to ensure that it continues to meet your needs as you get older. To be legally valid in England and Wales, you need two people (non-beneficiaries) to witness and sign it, together with the date.
#1 Appoint your executors
Who should make sure that your will is adhered to after you are gone? Your will is ideal for assigning one or more trusted people (executors) for this role. Of course, make sure they are happy to do this before appointing them - and ensure they know where your will is stored, for easy finding later. It is also a good idea to have a “backup” executor in case your first choice(s) cannot perform the role (perhaps due to illness).
The executor role takes up considerable time and is not a light responsibility. Make sure they fully understand what they will be required to do. You may also need to be mindful of “family politics” when choosing executors. If you have 3-4 children, for instance, then would appointing only your eldest cause problems? It may help to have a family discussion about it, even though this is likely to be awkward or difficult.
In some cases (e.g. when dealing with an especially complex estate), it may be best to find a professional executor rather than relying on family. Although this comes with a fee, it can help ensure no mistakes are made and provides an impartial arbiter if there is a family dispute.
#2 Choose your beneficiaries
Who would you like to leave your inheritance to? As financial planners, we sometimes hear people say: “I don’t need a will; my spouse will just get everything when I die”. Yet assumptions like these can lead to mistakes later. For instance, in England and Wales, up to £270,000 in assets (including property) is left to a surviving spouse from the deceased’s estate if the latter did not have a will - together with all personal possessions. Half of the remainder, however, is divided equally amongst any children.
Naming your beneficiaries in your will helps to avoid problems later. If you want your spouse to inherit everything when you die, then you need to explicitly say so. However, most people are likely to have more specific wishes and it is important to thinking carefully about the various beneficiaries - and scenarios that might arise.
For example, do you want to leave anything to children or grandchildren? At what age - and in which circumstances - would you want them inheriting from you? How would you want your assets allocated if one of your beneficiaries died before you? Should anyone be excluded from inheriting anything?
#3 Name your guardians
If you have dependants, such as young children, then your will is ideal for specifying who would look after them if you died before they can live on their own. Similar to your executors, ensure that your guardians fully understand what the role entails, that they are happy to do it and that they are able to provide care (e.g. do they have enough space in their house). Also, think about setting up backup guardians, just in case.
#4 Identify all of your assets
It is almost impossible to be “too specific” with the assets in your will. Taking time to list all of them and set out what you want to do with them will give you great peace of mind (also saving confusion later). Be especially careful if you own assets outside the UK, such as property. Your UK will should deal responsibly with your UK assets, and you should ensure that any overseas assets are organised in a way that works effectively with your UK will. Assets might include:
- Cash savings in regular accounts and/or a cash ISA.
- Investments in a stocks & shares ISA and in general investment accounts.
- Property - including the family home and additional properties (e.g. Buy To Lets).
- Pension funds (not your State Pension, since special rules apply here).
- Personal possessions and collectibles - e.g. jewellery or a classic car.
You should also mention your outstanding liabilities - such as mortgages, credit card debt and personal loans - which will need to be dealt with if you die before addressing them.
#5 Plan for inheritance tax
Inheritance tax (IHT) is 40% on the value of an individual’s estate over £325,000, assuming no exemptions apply. There are tools you can use to minimise needless IHT liability, however, and your will is the perfect vehicle for employing them.
If you would like to discuss IHT planning, get in touch.
What a cashless UK might mean for pensioners
What a cashless UK might mean for pensioners
One interesting campaign point during the recent Conservative leadership contest is protecting the right for people to use cash. Whilst it is unlikely that physical currency will die out any time soon, many have argued that the UK is moving towards a “cashless society”. In this future, coins and notes are no longer used for financial transactions. Instead, people would rely on digitally-based payment methods such as apps, credit cards and debit cards. There is a concern, however, over how this change would affect British society - and pensioners in particular, who typically rely on cash to a greater degree. Below, we explore how far the UK is in heading towards a cashless society, how this could affect pensioners and some implications for your financial plan.
How “cashless” is the UK in 2022?
Cash is clearly still a crucial part of the UK economy. At present, there is £70bn worth of notes in circulation. This is almost double the volume from a decade ago, and roughly equates to £1,000 per person. The vast majority of these notes are held in our wallets, ATMs, banks, shop tills and in the “shadow” economy (e.g. kept overseas and intended for illegal use).
Despite this, digitally-based payments are becoming more widely used. In 2017, there were 13.2bn card payments in the UK, overtaking cash payments for the first time (13.1bn). Digital transactions became even more widespread in 2020 when the government imposed national lockdown measures to fight COVID-19. Stuck in their homes, people were forced to buy items online rather than entering a business’s premises and handing over cash.
The impact of a cashless society on pensioners
Whilst the Bank of England (BoE) reassures everyone that cash is not disappearing anytime soon, some studies suggest that cash payments could comprise just 10% of all transactions in the UK by 2037. This possibility has raised concern from Liz Truss and others, particularly since around 21% of over-65s (2.4m people) rely on cash everyday spending.
Indeed, one survey by YouGov in January 2021 found that nearly half of people in this age group (6.3m people) used cash in the last week. This was despite the UK being in national lockdown at the time, and older people were required to “shield” in their homes. Clearly, many people are unwilling - or not ready - to give up cash just yet; especially those aged over 65.
Pensioners have not always found it easy to adapt to the rapidly changing technology used for digital payments. In England and Wales, 13 councils have been found to operate car parks that are completely cashless - requiring locals to use a smartphone app instead. Although nearly 20% of Britons aged over-75s now own and use a smartphone regularly, many are still reluctant or unable to use one (e.g. due to health reasons or fears about online scams).
Another concern of a digitally-based payment economy is that it might lead to some pensioners running out of money. For instance, many people like to set a weekly budget and withdraw cash each week - helping them manage their discretionary spending (e.g. meals out). However, many businesses now simply do not accept cash, which can derail healthy money habits like these.
One survey found that 25% of adult respondents tried to spend notes/cash in a shop recently, but the establishment would not accept physical payment - forcing the customers to use a card. At the present time, with the cost of living rising rapidly, such developments should not be regarded lightly. Around 10% of shoppers now state that they plan to ditch contactless payments and use cash instead, so they can better control their spending.
What can pensioners do to prepare for a possible “cashless” UK?
It is important to reiterate that a cashless society is not imminent. However, it is certainly getting harder to rely on it to make payments. Car parks, restaurants, shops and garden centres are increasingly only accepting cards - not cash. ATMs are also facing an existential threat: nearly 25% of machines have disappeared since 2018. Moreover, since 2015 almost half of UK bank branches have been earmarked for closure.
One option, of course, is to raise the matter with your MP and local council if you feel strongly about keeping cash as a payment option - not just across the UK, but in your community. It may be comforting to know that the Financial Conduct Authority (FCA) will be given powers to make sure that withdrawal and deposit facilities (as well as a Post Office) are available across the country within a “reasonable distance”. However, this may not guarantee that you have a bank branch nearby as many lenders are rushing to close less profitable branches before new laws come into force.
If you are finding it difficult to make cash payments on a regular basis (e.g. when shopping in town), then you may want to invest time into learning how these digitally-based payment technologies work. You do not need to ditch cash to do this. However, it may be useful to have a smartphone-based way of paying an establishment, as a backup, if faced with a situation where you cannot pay in cash. Another idea is to request that businesses clearly sign post outside the premises if they do not accept cash, so you are not left in an uncomfortable position at payment.
Contact your PS Aspire adviser if you’d like more information on digital payments and how to plan.
How to make the most of the 2022-23 tax year
How to make the most of the 2022-23 tax year
Every tax year (6th April - 5th April) offers a fresh opportunity to put more money back into your own pocket, but many people miss out on valuable allowances, often leaving things until they’re too late.
Although next April may seem far away, getting ahead with your tax allowances could do wonders for your financial plan. This might include boosting your future retirement lifestyle, or improving your income from investments now - taking strain off your finances during the current cost of living crisis.
Here, we take a look at some of the allowances you may want to consider, but for more info on how you may be affected you should contact your financial adviser.
Pension annual allowance
A pension is a great tool to boost the growth of your retirement fund. Not only is all investment growth tax-free, but your contributions get a “boost” from the government via tax relief. This is equivalent to your highest marginal rate of income tax. So, a Basic Rate taxpayer gets 20% tax relief and a Higher Rate taxpayer gets 40%.
Think of it like this. It only “costs” a Higher Rate taxpayer 60p to put £1 into their pension. This is equivalent to a 40% return on your investment before your contribution even experiences any compound interest. You can put up to £40,000 into your pension(s) each tax year or up to 100% of your income (if this is lower). Here, you have a bit of flexibility since you can use the “carry forward” rule to access any unused allowance from the previous three tax years.
Most people contribute to their pension via their salary. It can be hard to put a large lump sum into your pension unless you come across a large windfall (e.g. from an inheritance). Make sure, therefore, that you continue to contribute to your pension each month to get the best from your annual allowance. It might be tempting to lower or stop these during hard economic times, but you should seek professional advice before doing so.
ISA allowance
Many people know that you can put up to £20,000 into your ISA(s) and receive interest, capital gains and dividends without tax. However, too many people don’t use their ISAs efficiently. A common mistake is holding cash in an ISA instead of investments.
In 2022, interest rates offered by ISAs are rarely better than those offered by regular savings accounts. By putting too much cash in an ISA, you could be taking up some of your £20,000 allowance which might otherwise be dedicated to investments*.
Also, consider how your ISA can be used to best achieve your investment goals. Those in their 50s who want to retire early, for instance, might want to focus on drawing income from a Stocks & Shares ISA (e.g. dividends) before accessing pension funds. This is partly because the latter can be passed down eventually to beneficiaries without inheritance tax (IHT), but ISAs normally can’t. However, a young person looking to save for a first property deposit may benefit more from contributing to a Lifetime ISA. Here, you can contribute up to £4,000 per tax year and the government will add 25% (up to £1,000).
Tax allowances
Not all investments can - or should - be put straight into an ISA to achieve tax efficiency. Each year, you are also granted a range of tax-free allowances which sit outside of your ISA and pension. These include a dividend allowance (£2,000), a personal savings allowance (up to £1,000 tax-free interest, or £500 for those on the Higher Rate) and a capital gains allowance (£12,300). By using these strategically alongside your ISA, you can maximise your after-tax (“real”) returns and put more money back in your pocket.
For instance, suppose you have two medium-term investment goals: to grow a fund for a future property purchase (before retirement), and to generate an income from other investments along the way (i.e. mainly from dividends). Depending on how much you want to contribute towards each portfolio, your dividend investments might sit best within an ISA. This is because the tax you pay on dividends as a Higher Rate taxpayer (33.75%) is greater than the tax you pay on capital gains from non-residential property (20%).
If you have any of your £20,000 ISA allowance left over, then you could put some of the money for your first investment goal into a Stocks & Shares ISA (geared towards investment growth). Anything left over could be put into a General Investment Account (GIA), where you can achieve tax-free capital gains up to £12,300 within that tax year.
Work with a trusted adviser
The previous example starts to show how using your yearly tax-free allowances can help to save money. Yet it also highlights some of the complexity involved with tax planning. After all, how should you best combine your allowances for taxes, your ISA and your pension? Your unique financial goals and needs might require a different approach.
It can help tremendously when you use the help assistance of a chartered financial planning firm, to help you navigate the UK’s complex tax landscape effectively. It’s easy to make costly mistakes on your own which you may regret later. Make sure you have the best available information available to you so you can move confidently towards your goals.
Contact your financial planner to discuss how to make best use of your tax allowances.
*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.
