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If you are the type of person who believes a new year should be accompanied by resolutions to achieve a happier and healthier life, then it stands to reason that financial wellbeing should be in the mix. And while it’s always important to ensure your financial plan is up to date, 2022 is a year when the cost of doing nothing could be especially significant.
That’s because there are two important forces combining to reduce your real-term earnings: tax and inflation. From April, both National Insurance and dividend tax will increase by 1.25%, affecting all taxpayers including pensioners who rely on supplementary investment income. The tax hike is hot on the heels of a de facto tax rise last year via a freeze up to 2026 on the income tax thresholds, in addition to the capital gains tax annual exemption.
It might not end there. A commitment by the Chancellor, Rishi Sunak, to reduce taxes by the end of this parliament, which runs to 2024, hasn't cooled speculation that the Treasury is also eyeing up raids on pension tax relief. It certainly would not be the first time a government disguises a tax hike in one place with a more eye-catching tax cut elsewhere.
“The Covid relief packages have to be paid for and one way of doing that, without increasing tax per se, would be to remove pension tax relief,” says Gill Philpott, Tax and Trust Specialist at Ascot Lloyd. “There are three ways of paying into your pension: relief at source, net pay or salary sacrifice. Salary sacrifice is the only one that gives you NI relief, which is often seen as benefiting wealthier taxpayers. It may be an easy target while supporting the government’s levelling up agenda. Make the most of allowances and reliefs while you can.”
Meanwhile, the cost of living continues to grow. The UK’s headline rate of inflation rose to 5.1% in the 12 months to November; the fastest growth in a decade and way beyond the Bank of England's target of 2%. An energy cost crisis coupled with Covid-driven supply shortages has baked inflationary pressure into supply chains, causing subsequent price hikes on other goods and services. Households will be impacted further when the energy regulator Ofgem puts up its energy price cap in April. The Bank of England warns inflation could hit 6% by Spring – the same point at which the tax increase begins hitting earners.
The Bank responded last month by increasing interest rates for the first time in more than three years, from a record low of 0.1% to 0.25%, and further increases could be on the cards in 2022. Homeowners on variable or tracker mortgages are likely to have already seen their monthly repayments increase, while the Bank Rate also influences the interest charged on other forms of credit, including bank loans, car financing and credit cards. On the other side of the coin, higher interest rates are more attractive to savers because cash is worth more, though relatively speaking rates do remain very low by historical standards.
With inflation rising, it could be time to revisit an investment strategy. Equities have traditionally been viewed as a good inflation hedge, along with inflation-linked bonds, though enduring Covid volatility and speculation of a US equities bubble might push investors to alternative assets such as gold. Meanwhile a growing number of people have been buying bitcoin instead of gold, though certainly not those who avoid volatile assets.
One thing almost certain about 2022 is that it will bring more calls for the death of bonds. Though bond yields are at this moment rising, they will remain negative in real terms. This doesn’t mean, however, that they are no longer a strong portfolio diversifier. Your financial adviser will be able to explain why bonds can act like an insurance policy when equity markets aren’t going so well. Amidst all of the noise from the markets and media, remember your financial adviser creates a plan for your individual circumstances – and while we can expect another difficult market to navigate through in 2022, patience in investing is a virtue.
With so many different elements to consider in areas like retirement planning, investment portfolios and inheritance, you can see why it's important to ensure your financial plan is up to date, not least in a year when real-term earnings are likely to be affected more than normal. A fresh look at your plans can allow you to explore new options with your financial adviser, especially if your circumstances, attitude to risk or long-term objectives are changing.
“Whilst inflation might be higher now, it's important to not lose sight of the longer-term picture,” says Humaun Rashid, Independent Financial Advisor at Ascot Lloyd. “If like many people you have invested less in luxury spending during the pandemic, rather than leaving your savings in a cash account being eroded by inflation, why not see if topping up your existing plan and adjusting expectations might get you to your long-term objectives sooner?
“Life expectancy has been more visible during the pandemic which has caused a lot of clients to want to retire sooner and enjoy their life more now. We've undertaken cash flow modelling to demonstrate that if we bring their retirement forward, they won't run out of money. It's a case of choices, which might mean enjoying your lifestyle a bit more in your earlier retirement years and then reducing income in the later years when maybe health might not be as optimal. Having the confidence to retire relies on these kinds of insights.”
Small adjustments to your financial plan can bring big benefits, and even if there is nothing to do, simply checking in with your financial adviser can provide reassurance. Here are just some questions you might be thinking about as you consider your financial plans in 2022.
There is no tax payable on income or capital gains generated through an ISA (Individual Savings Account) wrapper – and every UK resident can pay £20,000 into an ISA each year. If you don’t use your annual allowance before the end of each tax year, you lose it. Parents can also pay £9,000 each year into a child’s Junior ISA.
If the Covid-19 pandemic has caused you to reconsider your prior retirement plans or work-life balance, you’re not alone. By working with you to plan ahead, including using tools that help calculate how much income you might need in different scenarios, we can show you the options you have and map out how you may achieve your new goals.
Unsurprisingly, the pandemic has also caused many people to revisit their Wills and estate planning. There are many damaging misconceptions about Wills that we can dispel, and we can also help you ensure your inheritance can be as tax efficient as possible for your family.
If you have had life insurance for years, or you purchased it as an ‘add on’ when buying a house, there might be gaps in your protection, so it’s important to reassess if it is still adequate. High income earners can also feel their assets are enough to ensure their family’s standard of living is maintained, but reviewing your lifestyle and outgoings could reveal a shortfall. Peace of mind is invaluable.
If you would like to find out more about any of the areas outlined above or are interested in receiving some advice, please don’t hesitate to contact your financial adviser.
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