June 2022 - Agile IFA

Rising inflation and concerns about recession risks continue to place pressure on households and affect economies around the world.

The World Bank has slashed its 2022 global growth forecasts from 4.1% to 2.9%. The organisation also warned the global economy is at risk of experiencing stagflation, where economic growth is stagnant, but inflation is high.

As an investor, you may be worried about the effect the current situation could have on your portfolio and long-term plans. Remember, short-term volatility is part of investing, and you should focus on investment performance over years rather than months.

If you have any questions, please contact us.

UK

Once again, inflation reached another 40-year high in the 12 months to May. The rate of 9.1% is slightly higher than the 9% recorded the previous month.

The conflict in Ukraine is significantly affecting both energy and food prices, which is likely to place pressure on household budgets.

The latest economic data has led to some experts suggesting the economy will be stagnant, or even contract, in the coming quarters. The British Chambers of Commerce now expects GDP to contract by 0.2% in the last three months of 2022, while the CBI has warned there is a risk of a recession.

The Bank of England (BoE) increased its base interest rate for the fourth time this year to 1.25% in a bid to tackle inflation. The Bank also commented that it expects inflation to hit 11% in October.

In May, chancellor Rishi Sunak unveiled a package of measures designed to support families through the period of high inflation, paid for through a one-off windfall tax on energy firms.

British Gas has criticised this step saying it will “damage investor confidence” while the industry is trying to build up green energy supplies.

Rising inflation is affecting both consumer and business confidence.

According to a survey from the Office for National Statistics (ONS), three-quarters of British adults are worried about the cost of living crisis.

It’s not surprising that many households are feeling anxious about their financial security. Further ONS data found that once inflation is considered, regular pay, which excludes bonuses, has fallen by 2.2% in the last 12 months.

A consumer confidence index from GfK suggests that people have a gloomier outlook now than they did during the pandemic or the 2008 financial crisis.

The Institute of Directors’ economic confidence index found that business confidence is at its lowest level since October 2020, which was just before the successful Covid-19 vaccine trial results were released. The pessimism was linked to inflation and the effects of Brexit.

S&P Global’s purchasing managers index (PMI) data shows the current situation is affecting businesses:

In May 2022, UK factory growth expanded at its weakest rate since January 2021 when Covid restrictions were still affecting operations. The slowdown has been blamed on weak domestic demand, falling exports, disruptions to supply chains, and rising costs.
The service sector is also experiencing weak growth as profit margins are being squeezed by rising prices.

Strikes across the UK are affecting business operations as well.

Public transport has been particularly affected, with train and Tube strikes expected to continue over the summer months. Barristers are also striking over legal aid fees, while other unions, including the country’s largest teaching union, are considering balloting members.

There are many reasons why workers are striking, but pay failing to keep up with inflation is among them.

The aviation industry is also facing staff challenges. A shortage in workers has led to flight chaos across the country. Hundreds of flights have already been cancelled as airlines and airports struggle to operate effectively with fewer employees. It’s left some holidaymakers stranded or out of pocket.

Mike Ashley, chief executive of the Fraser Group, continues to expand his retail empire despite the challenges facing the sector. He has purchased online fashion retailer Missguided out of administration in a £20 million deal.

Europe

Factory growth in the eurozone hit an eight-month low. Germany, often seen as a European powerhouse, saw factory orders fall by 2.3%. It’s the third consecutive monthly fall and could suggest the country will enter a recession.

While the European Central Bank (ECB) has been slower than the BoE and Federal Reserve in the US to increase interest rates to tackle rising inflation, it’s indicated that it will act in July. The plan will see key rates increase by 0.25 percentage points. It’s the first time the ECB will have increased interest rates in more than a decade.

US

Inflation in the US reached a four-decade high in the 12 months to May 2022 at a rate of 8.6%.

Matching the pattern seen in the UK and Europe, US factory growth also slowed. Production rates and new orders are still increasing but at a slower pace. Again, this was caused by falling demand and a shortage of some essential materials.

In previous months, business confidence has remained high despite the challenges. However, the rising number of jobless claims in the US could indicate that companies are letting staff go.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

More people than ever are embracing lifestyle changes to reduce the negative effect they have on the environment. As the effect of our choices becomes more widely known, some feel guilty about the decisions they make.

According to an Aviva survey, 64% of adults in the UK have experienced “green guilt” after carrying out environmentally-unfriendly actions.

If you’ve felt guilty about your lifestyle, there are some simple things you can do to have a more positive effect, including these eight steps.

1. Reduce how much plastic you buy at the supermarket

The effect of plastic pollution on wildlife and ecosystems is huge. So, it’s not surprising that using single-use plastic products is one of the most common things to cause green guilt.

The use of plastic shopping bags has fallen drastically since the charge was introduced in 2015 – 28% of people feel guilty when they buy one today. Choosing products that use less plastic packaging or purchasing reusable muslin produce bags to cut back further can make your weekly shop more environmentally friendly.

2. Choose paperless bills

If you’ve already set up direct debits and manage your accounts online, switching to paperless contact makes sense. Not only does it reduce waste, but the letters don’t need to travel to reach you.

When using paperless billing, make sure your account details are secure, regularly check that the bills are accurate, and download and save any necessary files.

3. Be mindful of your energy use

With utility bills soaring this year, cutting back on how much energy you use might be something that’s already on your mind.

Simple steps like switching gadgets off at the wall, rather than leaving them on standby, choosing energy-efficient light bulbs, and turning down your thermostat really do add up.

If you have a smart meter, you can easily track how the changes you’re making are affecting your energy use.

If you want to invest in your home and reduce bills in the long term, taking steps to improve its energy efficiency can make sense. From insulating your loft to upgrading windows and doors, these steps could dramatically cut how much energy you need to heat your property.

4. Cut back on using your car for short journeys

Hopping in the car when you need to pick up some milk or to drop the children off at school is convenient, but we know that a short journey can unnecessarily harm the environment.

More than a fifth of Brits said they feel guilty after using the car for a short journey. Committing to walking more will boost your eco-credentials, and there are lots of health benefits too.

5. Reduce how much meat and fish you eat

There are more options than ever for vegetarians and vegans, and you don’t have to give up meat entirely to have a positive effect on the planet.

Rearing animals is an intensive process that contributes to climate change in several ways, including deforestation and the release of greenhouse gases.

14% of people said they feel guilty about how much meat or fish they eat. Cutting out animal products just a few days a week can really add up. It’s also a chance to explore new dishes.

6. Choose local produce when you can

More people are choosing to support local businesses when they shop. It’s a step that can improve your community and means that items don’t have to travel as far to get to you. So, shopping at local butchers or greengrocers where possible can reduce your carbon footprint.

7. Add flowers to your garden

One simple way to help nature thrive is to make your garden more wildlife-friendly. Adding flowers can support the local ecosystem, from birds to insects, and brighten up your garden.

Adding plants to your outdoor space doesn’t have to be a lot of hard work. There are low maintenance options, such as wildflower seeds you can scatter. Planters are a good choice if you have limited space.

8. Offset your emissions

If you’re worried about your carbon footprint, offsetting emissions can reduce your impact. You may want to regularly offset your emissions or after one-off events, like going on holiday, as 12% of people said they feel guilty about travelling by aeroplane.

When you offset your emissions, your money will be used to fund projects like reforestation. However, be cautious as some projects may not have the positive effect you hope for, and some scams pose as offsetting projects.

Key tax allowances like the Personal Allowance and Capital Gains Tax (CGT) annual exempt amount can help your money go further. As research shows that overall tax allowances have been cut, it’s more important than ever to understand what allowances make sense for you, and how they can complement your financial plan.

According to calculations by Quilter, over the last decade, eight key tax allowances have fallen by 6% in total. As many of the allowances have failed to grow in line with inflation, in real terms, tax allowances have shrunk at a much sharper pace.

So, which allowances have changed the most in the last 10 years?

The 2 allowances that have increased since 2012/13

Two important allowances have increased in the last decade, which could reduce how much tax you pay.

1. Personal Allowance

The Personal Allowance is the threshold for paying Income Tax. You don’t pay Income Tax on any income that is below the threshold.

It was £7,475 in 2012/13 and has increased to £12,570 for the 2022/23 tax year – a 68% increase.

2. Capital Gains Tax annual exempt amount

If you’re disposing of some assets, such as stocks not held in an ISA, you may be liable for CGT.

The rate of CGT depends on your Income Tax rate, but it can be as high as 20%, or 28% if you’re selling some types of properties. Making use of the annual exempt amount can minimise how much tax you pay when selling assets.

For the 2022/23 tax year, the allowance is £12,300, up from £8,105 10 years ago.

The 6 tax allowances that have fallen in the last decade

1. Pension Annual Allowance

The pension Annual Allowance is the maximum you can contribute to your pension each tax year while still benefiting from tax relief (not including any “carry forward”). In the last decade, the allowance has fallen by 20% to £40,000 in 2022/23.

Some high earners may have an even lower Annual Allowance if they’re affected by the Tapered Annual Allowance. For every £2 you earn over £240,000 (adjusted income), your Annual Allowance falls by £1 to a minimum allowance of £4,000.

2. Pension Lifetime Allowance

The Lifetime Allowance is the total value your pension can be before you may face additional tax charges when you access it. Over the last 10 years, it’s fallen by 28%. So, how much you can save for retirement tax-efficiently has been significantly reduced.

For the 2022/23 tax year, the Lifetime Allowance is £1,073,100.

3. Money Purchase Annual Allowance

The Money Purchase Annual Allowance (MPAA) affects how much you can tax-efficiently add to your pension if you’ve already withdrawn an income from it. So, it may affect people who have flexibly retired or plan to return to work after taking some time off.

The MPAA is now just £4,000. It was £10,000 a decade ago.

4. Nil-rate band for Inheritance Tax

The nil-rate band is the threshold for paying Inheritance Tax (IHT). If the value of all of your assets is below the threshold, you don’t need to pay IHT. If it’s above the threshold your estate may be liable for IHT at a standard rate of 40%.

The nil-rate band hasn’t changed in the last 10 years and is £325,000 for the 2022/23 tax year. While that may seem positive, when you consider inflation and how the value of assets may have grown, particularly property, it’s fallen in real terms.

5. The Inheritance Tax (IHT) annual exemption

Much like the nil-rate band, the annual IHT gifting exemption is the same as it was 10 years ago. So, in real terms, it’s become less valuable.

The annual exemption is £3,000 for the 2022/23 tax year. This is the amount you can gift each tax year without it potentially being considered for IHT purposes, as it’s considered immediately outside of your estate.

6. Dividend Allowance

Dividends are a common way for investors to generate an income from their portfolio or for business owners to pay themselves.

The Dividend Allowance is how much you can receive in dividends before tax is due. When it was introduced in the 2016/17 tax year it was £5,000, but it’s now just £2,000.

How can you get the most out of your tax allowances?

With some allowances now frozen until 2026, understanding which ones make sense for you and will help cut your tax bill is important. We’re here to help you understand how to use the eight allowances above, as well as others that may be appropriate, in your financial plan.

Please contact us to arrange a meeting with our team.

Please note: This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.

The Financial Conduct Authority does not regulate estate planning or tax planning.

Next year, Boris Johnson’s social care cap will be introduced. So, what is it and what does it mean for you?

The social care cap limits how much an individual will pay for care during their lifetime. It will start in October 2023. The cap is £86,000, but it may not be as generous as it first seems.

The cost of care and the financial decisions someone must make if they or a loved one requires care have been debated, especially as more people are requiring care later in life.

The cost of care varies hugely between locations and the type of care needed. However, according to carehome.co.uk the average cost of living in a residential care home is £704 a week, adding up to £36,608 a year. If nursing care is needed, this rises to £888 a week, or £46,176 a year.

As a result, it’s not surprising that many people are worried about how they will pay for care if they need it and the decisions they’d need to make to fund it.

While a local authority may pay for some or all of care costs, this is means-tested, and most people will need to pay for at least a portion of their care bill. It can mean some people needing to use care facilities are forced to sell their homes or deplete the assets they’d worked hard to secure.

“Daily living costs” are not covered by the care cap

The social care cap will only cover the costs of care. It will not include “daily living costs”. This means care home residents will still be liable for costs such as rent, utility bills, and catering even after they reach the social care cap threshold.

The average daily living costs of a care home resident is difficult to assess. At the moment, many care homes do not itemise bills.

The exclusion of living expenses means it’s still important for people to consider care costs beyond the £86,000 cap.

The distinction between costs has led to criticism of the cap. It’s also received criticism for other reasons, including:

The cap remaining the same for everyone. Individuals with total assets with a lower value could lose more of their estate, as a percentage, than wealthier individuals.
Not tackling the issue of what is classified as “social care” rather than “healthcare”. Dementia sufferers, for instance, will often face higher care costs because the support needed typically comes under “social care” rather than “healthcare”.

If the value of your assets exceeds £100,000, you will need to pay for the cost of care

Whether or not you have to contribute to care costs depends on the total value of your assets, this may include things like your savings, property, and investments.

Under the new rules, people with assets under £20,000 will not have to deplete their assets to pay for care. However, they may have to make contributions from their income depending on how much it is.

If the value of your assets is between £20,000 and £100,000 you may get help from your local authority to pay for care costs, this will be dependent on your income and assets.

If your assets are more than £100,000, you will need to pay for all the care costs until the value falls below this threshold.

There are different savings and asset thresholds in Scotland and Wales.

So, once you consider the value of your property and other assets, it’s likely you would need to pay for care until the cap is reached, and then continue to pay for daily living costs.

It’s important to make potential care costs part of your long-term plan

No one wants to think about needing to use care services later in life. However, making potential costs part of your long-term plan can provide you with security.

Not only does it mean you have a fund to use if it’s needed, but it can also provide you with more choice if care is required. It may mean you’re able to choose a facility that offers the services you want or a residential care home that’s closer to your family and friends.

We can help you put a financial plan in place that will help you reach your goals and provide you with security when things don’t go to plan. Please contact us to talk about care and the steps you can take to create a care fund.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Pension auto-enrolment means that if you’re employed you’ve likely been automatically enrolled into a pension and contributions are deducted from your pay. However, the minimum contributions may not be enough to secure the retirement you want, and the sooner you identify a gap, the more options you have.

The current minimum contribution is 8% of your pensionable earnings, with 5% deducted from your salary and your employer adding the remaining 3%.

In many cases, the minimum contribution levels will not accumulate enough pension wealth to secure the lifestyle you want. It’s important to understand what income you want in retirement and the steps you can take to achieve this.

Just 27% saving for a “moderate” retirement lifestyle think they’re saving enough

The Pension and Lifetime Savings Association (PLSA) asked pension savers whether they think they’re saving enough for retirement.

Around three-quarters said they were, however, this fell significantly when they were asked about the retirement lifestyle they want to achieve.

41% of people said they wanted a “moderate” lifestyle, described as covering their basic needs and allowing them to do some of the things they would like in retirement. Just 27% believe they’re saving enough to reach this goal.

In addition, 33% said they were saving for a “comfortable” retirement that would allow them to do most of the things they would like. Only 14% of people with this goal feel they’re taking the right financial steps now.

Nigel Peaple, director of policy and advocacy at the PLSA, said: “We have long argued that current contribution levels are not likely to give people the level of income they expect or need.”

The organisation is calling on the government to gradually increase minimum contribution levels for both employers and employees.

Increasing your pension contributions now could afford you a more comfortable retirement and mean you’re financially secure in your later years. If you’re not sure how your pension contributions will add up over your working life and the lifestyle it will afford you, we can help you create an effective retirement plan that will give you confidence.

3 more reasons to increase your pension contribution

1. You’ll receive more tax relief

When you contribute to your pension, you receive tax relief. This means that some of the money you would have paid in tax is added to your retirement savings. Essentially, it gives your savings a boost and the more you contribute, the more you benefit.

Remember, if you’re a higher- or additional-rate taxpayer, you will need to complete a self-assessment tax form to claim the full tax relief you’re entitled to.

There is a limit on how much you can add to your pension while still benefiting from tax relief known as the “Annual Allowance”. For most people, this is £40,000 or 100% of their annual income, whichever is lower. If you’re a higher earner or have already taken an income from your pension, your allowance may be lower. Please contact us if you’re not sure how much your Annual Allowance is.

2. The money is usually invested

Usually, the money held in your pension is invested.

As you’ll typically be saving over decades, this provides you with an opportunity for your contributions, along with employer contributions and tax relief, to grow over the long term. It means your pension savings could grow at a faster pace and create a more comfortable retirement.

If you want to invest for the long term, doing so through a pension can be tax-efficient.

Keep in mind that your pension usually won’t be accessible until the age of 55, rising to 57 in 2028, and that investment returns cannot be guaranteed.

3. You could pay less tax through salary sacrifice

If you want to increase your pension contributions, it’s worth talking to your employer to see if they offer a salary sacrifice scheme. It could mean you have more for retirement while reducing your tax liability now.

As part of a salary sacrifice scheme, you, as the employee, would agree to reduce your earnings, while your employer would agree to pay the amount your salary has reduced by into your pension. As your income will be lower, you may be liable for less Income Tax while increasing your pension.

Again, keep in mind that you won’t be able to access your pension savings until you reach pension age.

Contact us to understand how you can get more out of your pension

If you’re not sure if you’re saving enough for retirement or want to understand how you can make your contributions add up, please contact us.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The value of your investments (and any income from them) can go down as well as up, which would have an impact on the level of pension benefits available.

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances. Levels, bases of and reliefs from taxation may change in subsequent Finance Acts.

More retirees are planning to work in some way after they retire. While this flexibility can boost your income and help you strike a work-life balance that suits you, it can lead to some tax implications that you need to consider.

According to a report from abrdn, just a third of people retiring in 2022 plan to give up work completely while two-thirds will continue to work. Flexible retirement is a growing trend, in 2020 just a third of retirees planned to continue working.

When asked how they will work in retirement, 24% of those retiring this year plan to work part-time in their current job or a new position, including in the gig economy. 15% will continue to work in their own business and 12% want to use retirement to become entrepreneurs.

So, while more retirees plan to continue working, many are exploring different options that will help them build the lifestyle they want.

Financial concerns are playing a role in the flexible retirement trend, but it’s not the only reason

While creating an income in retirement is a key reason behind the flexi-retirement trend, it’s not the only one. In fact, 32% said they want something to keep them busy.

Creating a sustainable income that will last throughout your retirement can be difficult to understand. You will often need to consider a range of factors, from life expectancy to potential investment returns. So, it’s not surprising that only a quarter of 2022 retirees are confident that they’ve saved enough.

Higher levels of inflation are adding a layer of complexity.

In the 12 months to April 2022, inflation reached 9%. Retirees that don’t consider how inflation will affect their cost of living over their retirement could find that their spending power dwindles. Inflation can mean that an income that afforded a comfortable lifestyle at the start of retirement doesn’t stretch far enough in your later years unless it rises at the same pace.

Despite this, 27% of retirees said they didn’t know how to mitigate the effect of inflation on their retirement income.

Financial planning can help you understand how your pension savings and other assets can help you build an income you can rely on in retirement. It means you can start this chapter of your life with confidence. For some, it may mean they continue to work past their retirement date.

Financial planning could also help you make your income more tax-efficient if you do plan to continue working in retirement. Just 25% of retirees that want to work are aware of the potential tax implications, and it could mean they face a larger bill than they expect.

3 important questions to consider if you’ll work in retirement

One of the reasons tax can become more complex if you want a flexible retirement is that your income may come from multiple sources and may change depending on your needs.

These three questions can help you understand how your decisions will affect how much tax you pay, and what you can do to reduce your tax bill.

1. Will you access your pension while you work?

If you’re earning an income from working, will you still need to access your pension?

If you have a defined contribution (DC) pension, you can access it flexibly from the age of 55, rising to 57 in 2028. This can help you secure the income you need even if your income from work changes.

However, your pension may be subject to Income Tax, so it’s important to understand how withdrawals will affect your overall tax liability. If your total income exceeds tax thresholds, you could find you pay a higher rate of Income Tax than you expect.

If you don’t need your pension to supplement your income, leaving it where it is can make sense. Money held in a pension is typically invested and can grow free from Capital Gains Tax. So, leaving it invested until you need it can help your savings go further.

2. Will you continue to pay into your pension?

An advantage of continuing to work is that you may still be able to pay into a pension, this can boost your financial security later in life.

If you’re an employee under the State Pension Age and earning more than £10,000 in the 2022/23 tax year, your employer must automatically enrol you into a pension, and contribute on your behalf. Even if you’re not automatically enrolled, you can still add to a pension and benefit from tax relief.

One thing to be aware of is the Money Purchase Annual Allowance (MPAA). If you access your pension to take an income, the amount you can tax-efficiently add to your pension each tax year may fall to just £4,000. If you unwittingly exceed this limit, you could face an additional tax charge unexpectedly.

3. Will you claim the State Pension?

If you plan to work past the State Pension Age, you should consider if you’ll still claim the State Pension.

The State Pension may be liable for Income Tax if your entire income exceeds the Personal Allowance, and it could push you into a higher tax bracket. As a result, if you don’t need the income, it can make sense to defer your State Pension for tax reasons.

If you do decide to defer your State Pension, you will receive a higher amount when you claim it. Your State Pension payments would increase by 1% for every nine weeks you defer, which is just under 5.8% if you defer for a year.

If you want to make the most out of your retirement savings, a tailored financial plan that considers your assets, lifestyle decisions, and goals could help reduce your tax liability and give you peace of mind. If you’d like to arrange a meeting with us to talk about your retirement, please contact us.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.