Chris Thorpe, Author at Agile IFA

Managing your finances effectively as a couple could provide you with peace of mind and mean you’re more likely to reach your goals. Yet, it can be difficult as you could have very different financial priorities to your partner. Read on to discover five handy tips that could help you build a financial plan that suits both of you.

1. Set shared goals you can work towards

Having shared goals you’re working towards as a couple can help ensure you’re both on the same page and understand why you’re making certain financial decisions.

For example, if you both want to retire early, you might decide to increase pension contributions. Without a reason, potentially reducing your disposable income now could be difficult to stick to.

However, with a long-term view of how cutting back now could mean you have more freedom in the future, you may find you’re in a better position to be successful.

2. Understand your partner’s attitude to money

One of the biggest challenges of managing finances with a partner is that you could have very different views about money.

Perhaps you’re a saver who feels more comfortable when you add to your emergency fund, while your partner is more likely to splurge on a treat. Or, when it comes to investing, one of you is more risk averse than the other.

Understanding your partner’s approach to managing assets and their long-term financial outlook could help you strike a balance that means you both feel confident about your finances.

3. Make your financial plan part of your conversations

Finances play a crucial role in day-to-day life and your long-term security, from managing household bills to preparing for retirement. Yet, it’s a topic many couples avoid talking about and, for some, when they do, it can cause conflict.

According to a survey from Aviva, a quarter of couples argue about money at least once a week, and 5% said they bickered about finances every day.

Making money part of your conversations could improve communication as you have more opportunities to address small disagreements before they possibly become larger issues.

4. Be clear about how you’ll manage assets together and individually

You don’t need to inform your partner of every purchase you make or share all your assets to create an effective financial plan as a couple. However, understanding and talking about how you’ll share assets and financial responsibility is often important.

Worryingly, a survey from Starling Bank found that almost a quarter of married couples and 30% of people in a committed relationship said they keep financial secrets from their partner.

Some secrets may be harmless, such as having a nest egg in case of emergency, but others could potentially negatively affect your financial security. For example, a fifth of those with a financial secret said they are hiding debt from their partner, and 16% are concealing loss of money, such as through gambling or poor investments.

Being open about money and setting out how you’ll manage assets together or individually could ensure you’re both on the same page and avoid potential conflicts related to financial secrets.

What’s important is that you find a way to manage assets in a way that suits you and your partner.

5. Arrange a meeting with a financial planner

Working with a financial planner could benefit you and your partner in many ways, from identifying potential tax breaks to setting out a plan to save for retirement. Yet, one perk you might overlook is how it could help you better manage your finances together.

Ongoing financial reviews as a couple mean that time is regularly set aside to talk about money, your goals, and financial concerns. It may mean you’re more likely to stick to your plan and provide an opportunity to update it if your circumstances change.

A financial planner may also act as a useful third party who might help you unify different objectives. By working together with a financial planner, you may create a plan that gives both of you confidence about your financial future.

If you’d like to create a financial plan with your partner, please get in touch to discuss how we could help you and arrange a meeting.

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 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 performance.

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.

Chancellor Jeremy Hunt could have more options ahead of March’s Budget as government borrowing halved at the end of 2023. With a general election looming, Hunt may take the opportunity to ease the tax burden. Read on to discover some of the personal finance changes that could be announced.

Figures from the Office for National Statistics (ONS) show that government borrowing halved in December 2023. The lower deficit of £7.77 billion – the lowest month since 2019 – means the chancellor has more scope to implement tax cuts, increase public spending, or pay down debt.

The annual Budget sets out the government’s proposals for changes to taxation. So, the announcements could affect your finances and long-term plan. Here are three changes the chancellor is reportedly contemplating.

1. Cutting Income Tax

There’s speculation that changes to Income Tax could reduce the tax burden on households. It would follow National Insurance rates being cut for employed and self-employed workers in the Autumn Statement.

While Income Tax rates haven’t increased in recent years, the thresholds have been frozen until April 2028. While your tax bill might not rise immediately, frozen thresholds could mean you pay more in the medium term or that you’re pushed into a higher tax bracket, even if your income hasn’t increased in real terms.

Indeed, the Office for Budget Responsibility (OBR) estimates that freezing the threshold for paying the higher- and additional rate of Income Tax will raise £42.9 billion by 2027/28.

Hunt has a few options if he wants to decrease the Income Tax burden before the general election. He could opt to increase the thresholds in line with inflation or reduce the tax rate.

2. Abolishing Inheritance Tax

Ahead of Hunt delivering the Autumn Statement in November 2023, it was reported he was mulling over abolishing Inheritance Tax (IHT).

IHT is a type of tax on the estate of someone who has passed away if the value of their estate exceeds certain thresholds.

While only around 4% of estates are liable for IHT, it’s often referred to as “Britain’s most-hated tax” in the media.

The ONS data shows that between 2022 and 2023, IHT tax receipts were £7.1 billion. While that may seem like a large number, it represents just 0.28% of GDP. As a result, abolishing IHT could be viewed as a way to deliver a pre-election day boost with a relatively small reduction in the total tax collected.

Alternatively, the chancellor could increase the thresholds for paying IHT or lower the tax rate.

The thresholds for paying IHT have remained the same since 2020, and are currently frozen until April 2028. As they’re not rising in line with inflation, more estates are becoming liable for IHT as the value of assets, particularly property, may have increased.

For the 2023/24 tax year:

The nil-rate band is £325,000. If the entire value of your estate is below this threshold, no IHT is due.
The residence nil-rate band is £175,000. Your estate may be able to use this allowance if you leave certain properties, including your main home, to direct descendants.

The standard rate of IHT on the proportion of the estate that exceeds the thresholds is 40%. So, another option Hunt may consider is reducing the rate.

3. Increasing the ISA annual allowance

Again, there was speculation ahead of the Autumn Statement that the ISA annual allowance would increase. This didn’t materialise, but Hunt did announce key changes to simplify ISAs and make it easier for consumers to transfer their money.

ISAs offer a tax-efficient way to save or invest. In the 2023/24 tax year, you can add up to £20,000 to your ISA. The annual allowance has remained at this level since 2017 rather than rising at the same pace as inflation.

Money saved or invested outside of an ISA could be liable for tax. As a result, raising the allowance may provide some people with a lower tax bill overall.

The latest government figures show 11.8 million adults used their ISA to save or invest in the 2021/22 tax year. So, increasing the ISA allowance could be a savvy option before the public goes to the polls.

We can help ensure your financial plan continues to reflect policies

Keeping track of government policies and understanding what they mean for your financial plan can be difficult. As financial planners, we can help you keep your long-term plan up-to-date and explain when announcements might affect you.

If you have any questions about what the upcoming Budget may mean for you, please get in touch.

Please note:

This article is for general information only and does not constitute advice. The information is aimed at retail clients 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.

If you haven’t used your ISA allowance for the 2023/24 tax year, it could be wise to review your options over the next few weeks before the 2024/25 tax year starts. Read on to discover some of the reasons why an ISA could make sense for you.

Government statistics show that ISAs are a popular way to save and invest. Indeed, the latest data shows 11.8 million adult ISAs benefited from a deposit during the 2021/22 tax year. Collectively, ISA holders added around £66.9 billion to their accounts throughout the year.

The media often dubs February and March “ISA season” as savers and investors are encouraged to deposit money into their ISAs before a new tax year starts on 6 April. Some ISA providers might also offer more attractive terms during this time, such as a higher interest rate, to entice potential customers.

In the 2023/24 tax year, you can add up to £20,000 to an ISA. If you haven’t already used this allowance, here are four excellent reasons you might want to do so.

1. A Cash ISA could be a tax-efficient way to save

One of the reasons Cash ISAs make up an important part of many financial plans is that they’re tax-efficient – the interest paid on savings held in a Cash ISA is not liable for Income Tax.

Many savers have welcomed rising interest rates over the last year. Yet, it could also mean you face an unexpected tax bill.

According to the Telegraph, 2.7 million savers will pay tax on their savings in 2023/24 as a result of frozen thresholds and higher interest rates. The findings suggest that almost 1 million additional savers could face a tax bill on their savings when compared to just a year earlier.

Around 1.4 million basic-rate taxpayers are expected to pay tax on their savings this year, a figure that has quadrupled in the last four years.

If the interest your savings earn exceeds the Personal Savings Allowance (PSA), you might be liable for tax on the portion above the threshold. Your annual PSA depends on the rate of Income Tax you pay:

Basic-rate taxpayers: £1,000
Higher-rate taxpayers: £500
Additional-rate taxpayers: £0

As additional-rate taxpayers don’t benefit from a PSA, an ISA could be a useful way to manage your tax bill.

Even if you’re not an additional-rate taxpayer, the amount you can hold in your savings account before you could face a tax bill might be lower than you expect.

According to MoneySavingExpert, if your savings account had an interest rate of 5.22%, assuming the account balance was constant, you might need to pay tax if your savings exceed:

£19,158 if you are a basic-rate taxpayer
£17,242 if you are a higher-rate taxpayer.

So, placing your savings into a Cash ISA could reduce your potential tax liability.

2. A Stocks and Shares ISA could help you invest efficiently

Similarly, Stocks and Shares ISAs could also be tax-efficient if you want to invest. The returns your investments deliver when they’re held in a Stocks and Shares ISA are free from Capital Gains Tax (CGT).

Investments held outside of a Stocks and Shares ISA could be liable for CGT if they exceed the Annual Exempt Amount, which is £6,000 in the 2023/24 tax year for individuals. You should note the Annual Exempt Amount will halve to £3,000 for the 2024/25 tax year.

The rate of CGT you pay depends on which tax band the gains fall into when added to your other income. In 2023/24:

Higher- or additional-rate taxpayers have a CGT rate of 20% (28% for residential property)
Basic-rate taxpayers may benefit from a lower CGT rate of 10% (18% for residential property) if the gains fall within the basic-rate Income Tax band.

According to the Financial Times, the latest HMRC figures show that a record £16.7 billion was collected through CGT in 2021/22. As the Annual Exempt Amount has fallen since then and will be cut again in 2024/25, it’s likely the amount collected through CGT will rise further.

As a result, if you’re investing, doing so through a Stocks and Shares ISA could be efficient from a tax perspective.

3. You’ll lose your ISA allowance if you don’t use it before the start of a new tax year

An ISA could reduce your potential tax liability whether you want to save or invest. So, why should you review your ISA over the coming weeks? Simply, the allowance will reset when a new tax year starts.

If you don’t use the current tax year’s allowance before 6 April 2024, you’ll lose it.

Not reviewing whether to use your ISA allowance could mean you overlook an opportunity to reduce your tax bill.

4. You could receive a government bonus with a Lifetime ISA

For some people, a Lifetime ISA (LISA) could prove a valuable way to save or invest thanks to a government bonus.

You must be aged between 19 and 39 to open a LISA, although you can continue to contribute to a LISA until you’re 50. You can deposit a maximum of £4,000 each tax year into a LISA, and can choose between a Cash LISA and a Stocks and Shares LISA.

Where a LISA is different to traditional ISAs is that deposits benefit from a 25% government bonus. So, if you deposit the annual maximum of £4,000 into a LISA, you’d receive £1,000 as a bonus.

However, if you take money out of a LISA before you’re 60 for a purpose other than buying your first home, you’ll be charged 25% of the amount withdrawn. This means you’d lose the bonus and a portion of your own deposit, equivalent to a loss of just over 6%.

Get in touch to talk about your ISA and long-term plans

If you have any questions about how to use the ISA annual allowance to support your financial plan, we’re here to help. Please contact us to arrange a meeting.

Please note:

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

The value of your investments (and any income from them) 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.

When you start thinking about the steps you need to take when retiring, your focus might be on the financial side. Yet, it’s often a good idea to start with your lifestyle aspirations.

Last month, you read about the different options when deciding how you’ll retire. Now, it’s time to consider what your ideal retirement lifestyle would look like.

Setting out your retirement lifestyle may be useful for several reasons, including:

Giving your retirement plan a focus
Helping ensure your financial plan reflects your aspirations
Informing the financial decisions you make.

So, if you’ve yet to think about what your life will look like once you stop working, it could be a rewarding task.

3 useful questions to answer when setting out your retirement lifestyle

Being clear about what you’d like your retirement to look like could help turn it into reality. These three questions may be a useful place to start.

1. What are you most looking forward to about retirement?

One of the main reasons people often look forward to retirement is that they’ll have more free time – so it’s worth thinking about what you’re most looking forward to spending time on.

According to an Aegon report, more than half of those nearing retirement are hoping to spend more time with loved ones. In addition, 45% plan to use retirement to see more of the world by travelling, and a third are looking forward to having the free time to pursue new hobbies.

Focusing on what brings you joy can help you build a life after work that is rich and fulfilling.

2. What does your ideal daily retirement routine look like?

When you set out what you’re looking forward to, you might focus on the larger aspects, like exploring a new destination for several weeks each summer. Yet, you shouldn’t overlook daily life that will make up much of your time – how do you want to spend your average day?

3. How will you maintain social connections?

According to Age UK, 1.4 million older people in the UK are often lonely. Social connections are important for wellbeing and could help you enjoy the next stage of your life much more.

Your working relationships might play an important role in your life now. So, it may be valuable to consider how you’ll maintain existing social connections and forge new ones.

For example, you could arrange to see your grandchildren after school each week or provide childcare during the school holidays. Or you may want to join a social club that allows you to meet new people who have similar interests.

Clear lifestyle goals could help ease the emotional challenges of retiring too

When you assess the retirement challenges you could face, financial matters could once again top the list.

You might be concerned about running out of money in your later years, or the effect inflation could have on your spending power. Indeed, in a Legal & General survey, 94% of people said their most important retirement dream was to feel financially secure for the rest of their life. Money worries were also the biggest cause of pre-retirement angst.

Yet, the emotional side of retiring can present obstacles too. It can be difficult to step away from the routine and social side of work that may have played an important role in your life for decades.

It’s normal to feel some apprehension about the milestone or to face emotional challenges once you retire. Putting your lifestyle goals at the centre of your retirement plan could ease some of the concerns you might have.

Contact us to talk about turning your retirement plans into a reality

Financial plans often start with understanding your goals and lifestyle aspirations. If you’re approaching retirement and want to create a plan you could have confidence in, please contact us to arrange a meeting.

Next month, read our blog to learn more about the financial decisions you might make, including how to use your pension, as you approach retirement.

Please note:

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

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.

Many markets rallied during December based on the expectation that interest rates will start to fall in 2024. Read on to discover what else may have affected your investment portfolio in the final month of 2023.

On 27 December, the MSCI World Stock Index, which comprises stock from nearly 3,000 companies to track global equity-market performance, was up 4.5% when compared to the start of the month. It was driven by expectations that interest rates will start to fall in early 2024.

The price of gold has also been affected by hopes that interest rates have peaked. In December, the price of gold reached a record high of $2,111.39 (£1,650.08) an ounce.

So, what else affected markets as 2023 drew to a close?

UK

Official figures from the UK paint a gloomy picture for the economy.

According to the Office for National Statistics (ONS), the economy unexpectedly shrank by 0.3% in October as both households and businesses faced pressure amid the cost of living crisis.

Chancellor Jeremy Hunt said it was “inevitable” that GDP would be subdued while interest rates are high to bring down inflation. He added that announcements made in the Autumn Statement in November mean the economy is now “well-placed to start growing again”.

However, revised figures for the third quarter of 2023 provided a further blow. Previously, the ONS said the UK posted no growth between July and September 2023, but an update reveals the economy shrank by 0.1%. Despite this, Hunt said the medium-term outlook is “far more optimistic” than GDP data suggests.

There was some positive news when it came to inflation. In the 12 months to November 2023, inflation was 3.9%, down from 4.6% in October.

Yet, the Bank of England’s (BoE) Monetary Policy Committee voted to hold interest rates at 5.25% rather than cut them. BoE governor Andrew Bailey said he was willing to do “what it takes” to bring inflation down to 2%.

While interest rates haven’t fallen yet, there are signs they could in the coming months.

The yield, or interest rate, on 2-, 10-, and 30-year UK bonds fell mid-month. Yields often fall when bond prices rise, which indicates that markets expect the BoE to start cutting borrowing costs in 2024.

Falling interest rates could provide some much-needed relief for both businesses and households that have been affected by the rising cost of borrowing. The government has also been affected.

According to the Treasury, public sector borrowing was higher than expected in November at £14.3 billion and the interest payable on central government debt hit £7.7 billion. While slightly lower than October’s figure of £8.1 billion, it’s the highest since records began in 1997 for a November.

Data indicated that businesses continue to face headwinds. The CBI reported that retail sales fell at a fast pace in the year to December, which is expected to continue into January, as consumers watched their spending.

Purchasing Managers’ Index (PMI) figures also found both the construction and manufacturing sectors are contracting. Dr John Glen, chief economist at the Chartered Institute of Procurement & Supply said the UK continued along a “fragile path” following news that manufacturing export orders fell for the 22nd consecutive month.

The FTSE 100 started the month with a 0.9% rise to 7520 points on 1 December. Mining stocks were leading risers, and homebuilders also benefited from a boost on the news that house prices could start rising again in 2024.

However, there’s no clear consensus about property prices. Indeed, Halifax predicts property prices could fall by up to 4% next year.

Europe

Data indicates that many European countries are in a similar position to the UK.

In the 12 months to November 2023, inflation across the eurozone fell to 2.4% – in the 12 months to November 2022, it was 10.1%.

However, the European Central Bank (ECB) opted to hold interest rates. The ECB’s Governing Council said: “While inflation has dropped in recent months, it is likely to pick up again temporarily in the near term.”

Nonetheless, anticipation of an interest rate cut in early 2024 led to stock markets in France and Germany rallying. France’s CAC-40 climbed as much as 0.4% to set a new record on 12 December, while Germany’s Dax also reached a new high.

PMI data for the eurozone show business activity fell sharply in December. Output fell at the fastest pace in 11 years if the early 2020 pandemic months are excluded.

As Europe’s largest economy, Germany is often used as an indicator for the area. The Ifo Institute measure of German business morale worsened in December – companies were less happy about current economic conditions and pessimistic about the future. Energy-intensive industries were found to be particularly gloomy.

US

US inflation fell to 3.1% in the 12 months to November 2023. Treasury secretary Janet Yellen said inflation is coming down “meaningfully” and she believes the current path will lead to inflation gradually declining to the Federal Reserve’s 2% target.

Employment figures suggest businesses are optimistic about the future. Federal Reserve data shows 199,000 jobs were added in November to indicate a strong labour market.

However, other figures paint a different picture. According to the Census Bureau, US factory orders fell by 3.6% month-on-month in October. In addition, a PMI reading suggests that the manufacturing sector is contracting.

Asia

Credit ratings agency Moody’s cut China’s credit outlook from “stable” to “negative”. The agency said it was due to concerns about rising debt and economic growth slowing. While the country’s credit rating remained the same at A1, the fifth highest rating, lowering the outlook suggests Moody’s could cut it in the future.

While many other developed countries are battling inflation, China has the opposite problem. Its inflation index fell 0.5% in November, showing prices are declining. Deflation could indicate that demand is low and may negatively affect businesses.

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.

When creating a financial plan, you often start with your goals. After all, setting out your aspirations first lets you create a plan that’s tailored to you. Yet, understanding your numbers is just as crucial for successful financial planning and they could help you understand the effect of your decisions.

So, which numbers are the key ones you should know?

Which numbers you may want to track will depend on your goals

To keep your financial plan on track, monitoring key numbers can help you assess your progress and identify potential gaps. Read on to discover which numbers could be important in two different scenarios.

Ensuring your family’s financial security

If you have a family, a key priority might be to ensure their long-term financial security. You might want to set money aside to pay for milestones, like helping children go to university. You may also be worried about what would happen if you faced a financial shock.

So, questions like those below could help you highlight the key numbers that will allow you to create a financial plan that reflects your circumstances.

What are your household’s day-to-day expenses?
What is the value of your family’s large financial commitments, such as a mortgage?
What is the value of planned one-off costs?
How much do you have saved in an emergency fund?
What percentage of your income is protected?

The answers to these questions may highlight things like a gap in your financial safety net that could mean your family is vulnerable to a shock. Or that you may benefit from putting money aside to pay for one-off costs, like supporting your child’s homeownership goals.

Planning for your retirement

When you’re planning for retirement, there are several key numbers you might need to consider. For example, the answers to these questions could be important:

How many years or months until you hope to retire?
What percentage of your income are you contributing to your pension?
How much income do you need in retirement, and how much will it need to increase to maintain your spending power?
How long will you spend in retirement?

With these numbers you may be able to start creating a plan that provides you with financial stability and peace of mind throughout retirement. Again, the results could help you identify potential gaps or indicate where you may need to compromise.

Key numbers could help you forecast how your wealth will change

Cashflow modelling could help you see how your wealth and assets may change over the long term.

To start, you input key information, such as your income, the value of your assets, or how much you are contributing to your pension each month. You can then see how your wealth might change over the years.

This is where knowing your numbers is important. Cashflow modelling is only as good as the data you input. So, taking time to understand the value of your assets and financial needs could be essential.

Once you’ve added the figures, you can use cashflow modelling to see the outcome of different scenarios. For instance, how would:

Your retirement income change if you increase your pension contributions?
Different investment returns affect your long-term wealth?
Gifting a lump sum to a loved one affect your long-term financial security?

So, it can be used as a way to understand how the decisions you make now could affect long-term plans.

The results of cashflow modelling cannot be guaranteed as the outcomes will be based on some assumptions, such as investment returns. However, it can provide a useful way to visualise how your financial decisions could affect your long-term wealth.

Regular reviews to update your numbers could be valuable. It also presents an opportunity to ensure your financial plan continues to reflect your goals. Over time, your aspirations might change, and, as a result, you may want to adjust your financial plan or the data used in your cashflow model.

Contact us to talk about your key numbers and how they could help you reach your goals

We can work with you to create a tailored financial plan that reflects your aspirations. Taking a bespoke approach could mean you feel more confident about your current finances and how they’ll change in the medium and long term.

With regular financial reviews to track key numbers, you can focus on what’s most important to you. Please contact us to arrange a meeting.

Please note:

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

The Financial Conduct Authority does not regulate cashflow planning.

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.

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.

While chancellor Jeremy Hunt announced he’d cut the rate of National Insurance (NI) in the 2023 Autumn Statement, he failed to change the thresholds or rates for Income Tax. While that might seem like a good thing – it’s better for your finances than a rate rise after all – your tax liability could still increase.

“Stealth taxes” refer to government policies that increase tax revenue even though they’re not labelled as tax hikes. Through freezing Income Tax thresholds, the government may benefit more than you expect.

Income Tax thresholds are frozen until April 2028

Income above your Personal Allowance, which is £12,570 in 2023/24, could be subject to Income Tax.

The rate of Income Tax you pay depends on which band your earnings fall into. For 2023/24, the Income Tax thresholds and rates are:

Please note Income Tax bands, thresholds, and rates are different in Scotland.

Crucially, the Personal Allowance and Income Tax thresholds are frozen until the 2027/28 tax year rather than increasing in line with inflation. This can lead to “fiscal drag”, where taxpayers are dragged into a higher tax bracket, even if their income hasn’t increased in real terms.

Furthermore, while you might have benefited from a rise in income, for much of the last two years, inflation has been higher than wage growth. So, many workers haven’t experienced a boost in their salary in real terms.

According to a BBC report, wage growth outpaced inflation in September 2023 for the first time since 2021.

Source: BBC

As a result, not only may your wages be failing to keep up with inflation, but you could find you’re pushed into a higher tax bracket. These so-called stealth taxes could mean your Income Tax liability increases more than you expect, and it may have a knock-on effect on your long-term financial plan.

Millions of taxpayers are expected to be affected by fiscal drag

According to figures from the Office for Budget Responsibility (OBR), the government’s policy of freezing Income Tax thresholds means that by 2028/29:

Nearly 4 million additional people are expected to pay Income Tax
3 million more will start paying the higher rate
400,000 workers will be dragged into the additional-rate bracket.

The figures represent a significant increase in the number of taxpayers in each band of Income Tax. The number of higher-rate and additional-rate taxpayers is expected to soar by 68% and 49% respectively.

Of course, this will boost government coffers. The freezes are estimated to raise £42.9 billion by 2027/28.

Indeed, the OBR said frozen thresholds are the “largest contributor to the rising overall economy-wide tax burden – responsible for almost a third of the 4.5% of GDP increase in taxes from 2019/20 to 2028/29”.

The cuts to NI offset some of the fiscal drag, but many taxpayers are likely to find their tax burden is higher overall.

On 6 January 2024, the main rate of employee NI was cut from 12% to 10% – saving the average employee earning £35,400 a year more than £450 annually. In addition, NI contributions for the self-employed will be cut from April 2024.

Yet, the OBR finds that the reduction in the employee rate of NI will reduce the government’s budget by only £180 million – far below the amount it expects to raise through Income Tax threshold freezes.

There may be ways you could reduce your Income Tax bill

The good news is that there may be steps you could take to reduce your Income Tax bill in a way that supports your finances now as well as your long-term goals.

Depending on your circumstances, you may want to:

Check if you could use the Marriage Allowance if your spouse or civil partner’s income doesn’t exceed the Personal Allowance
Increase your pension contributions to reduce your taxable income
Save through an ISA to reduce the tax you pay on the interest your savings earn
Make use of salary sacrifice schemes your employer offers
Use dividends to supplement your salary.

The above list isn’t exhaustive and it’s important to weigh up the pros and cons before you proceed.

Arrange a meeting with us to talk about your tax liability

If you’d like to understand if there are steps you could take to reduce your tax liability, please contact us to arrange a meeting. We can work with you to create a tailored plan that reflects your circumstances and goals.

Please note:

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

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.

High inflation has dominated headlines over the last two years. With the rate now slowly nearing the Bank of England’s (BoE) target, taking stock of what it means for your finances could be useful.

The BoE is responsible for managing inflation and aims to keep it at 2%. The central bank explains keeping inflation stable helps everyone plan for the future.

Several factors combined in 2021 that led to the rate of inflation soaring. It reached a peak of 11.1% in October 2022 – a 41-year high. In the 12 months to November 2023, it’s still above the BoE target but has fallen to 3.9%, according to Office for National Statistics data.

The BoE’s Monetary Policy Committee (MPC) said it expects inflation to continue falling towards the 2% target in 2024. However, it doesn’t expect to reach the target until the end of 2025.

Declining inflation doesn’t mean the cost of goods and services will fall

While slowing inflation could be a good thing for your long-term finances, it’s unlikely to deliver a boost to your everyday budget.

Falling inflation doesn’t mean the prices of goods and services fall, it simply means the pace at which the costs are rising is slowing down. So, it might be a good idea to review your day-to-day expenses. If your income hasn’t increased at the same rate as inflation, you could find your disposable income has fallen in real terms.

For example, let’s say your income was £3,000 a month in 2020. According to the BoE’s inflation calculator, your income would need to have increased by more than £630 a month just to maintain the same lifestyle in November 2023.

Falling interest rates could be beneficial if you’re a borrower

While the rate of inflation might not reduce the price you pay for goods and services, it could affect the cost of borrowing.

One of the main ways the BoE has sought to tackle inflation is by increasing its base interest rate. Higher interest rates can lower spending in the economy as both consumers and businesses tighten their belts.

As of December 2023, the BoE’s base interest rate is 5.25%, which compares to a rate of just 0.1% in November 2021. The MPC expects to maintain this rate through the first half of 2024 before gradually reducing it to reach 4.25% in 2026.

So, if you have a mortgage, credit card, personal loan or other form of borrowing, you might start to benefit financially from lower interest rates in 2024. For some, this could have a positive effect on their budget.

Making inflation part of your long-term goals could help keep you on track

The period of high inflation over the last two years has highlighted why it’s important to consider the rising cost of living when you’re making long-term plans.

Even when inflation meets the BoE’s target, the gradual rise of goods and services can add up.

Between 2010 and 2020, inflation averaged 2% a year. That might not seem like a lot, but over a decade it could gradually reduce your spending power if your income is static.

If you retired in 2010 and planned to take a monthly income of £2,000 from your pension for the rest of your life, you’ll start to notice your money doesn’t stretch as far relatively quickly.

Indeed, the BoE’s inflation calculator suggests your income would need to have increased to more than £2,400 by 2020 to maintain the same standard of living.

Now, imagine the effect stable inflation could have on your income needs over a retirement that might span several decades. During that time, you may also experience periods of high inflation, which could reduce your spending power even further.

It’s not just retirement planning that could be affected by inflation, but any of your long-term goals. Whether you’re setting aside money to support your children through university or to buy property in the future, inflation may affect your target and the steps you need to take.

Do you want to make inflation part of your financial plan?

Considering how outside factors, like inflation, might affect your goals could help your financial plan stay on track. Please contact us to talk about creating a long-term financial plan that could give you confidence, even when inflation is high.

Please note:

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

Pension savers dubbed “triple defaulters” could be overlooking small changes to their pension that may make their long-term finances more secure. Have you reviewed these three important pension decisions recently?

According to a survey from Aviva, millions of workers who have been auto-enrolled into a pension scheme have never updated their contributions, investment choices, or target retirement age. The findings could suggest many people are approaching retirement unprepared.

Indeed, more than half of those on a middle income due to retire in the 2050s say they have never heard of or know nothing about their retirement options. So, it’s no surprise that just 1 in 5 said they feel prepared in terms of how they will fund their retirement.

As your pension is typically invested for decades, even a small change could lead to the value of your savings at retirement being thousands of pounds more. So, you could benefit from reviewing these three pension decisions.

1. What percentage of your income is added to your pension?

If you’ve been automatically enrolled into a pension, you’ll pay the minimum contribution level. This is currently 5%, including tax relief, of your pensionable earnings.

While this might sound like a reasonable figure to put aside for your retirement, it could mean your lifestyle once you give up work falls short of your expectations.

According to the Aviva research, a person earning the median salary throughout their career who contributes the minimum amount to their pension from the age of 22, could expect a pension fund of around £225,000 when they retire in the 2050s.

This falls short of the savings a retiree is predicted to need to achieve a “moderate” lifestyle, according to the Pensions and Lifetime Savings Association.

In this scenario, if the individual puts an extra 2% of their income into their pension, its value could be £56,000 more at retirement – an increase of 25%.

Of course, many factors affect the value of your pension at retirement and performance cannot be guaranteed. However, the example demonstrates how regular contributions could add up to a substantial sum over the long term.

2. How is your pension invested?

Usually, when a pension is opened for you, your savings will be invested through a default fund. However, this might not be the best option for you, so it could be worth looking at the alternatives.

Typically, a pension provider will offer several different funds with various risk profiles. Some may also offer funds with “sustainable” objectives, which will invest in companies that meet its environmental, social, and governance (ESG) criteria. You may find that a different fund is more suitable for you once you review them.

Using the same scenario as the above example, a 22-year-old who secures higher investment returns of just 1% throughout their working life could see their pension value increase by £57,000 at retirement.

3. What is your target retirement date?

You don’t have to set a retirement date straight away, but having an idea of when you’d like to retire is also important.

If you haven’t manually set a retirement date with your pension fund, your provider will usually set it at State Pension Age. There are two key reasons why it’s important your retirement date is accurate.

First, your pension provider will send you annual statements, which will include a projection of the value of your pension at retirement. If you decide to retire sooner, you could find your pension savings fall short.

Second, pension funds will often automatically reduce the amount of risk your investments are exposed to as you near your retirement date to limit the effect of short-term volatility. So, setting the retirement date could help you manage risk.

Just 1 in 10 middle-income pension savers retiring in the 2050s have sought professional advice

As well as overlooking important pension decisions, the survey also suggests many aren’t taking professional financial advice.

Just 1 in 10 people who receive a middle income and will retire in the 2050s have already sought professional advice. This compares to around 37% of the same group in the US.

Interestingly, 58% of Brits who have retired in the last 10 years say they wish they’d known more about pension needs when they were younger.

Even if retirement is a goal that’s still several decades away, seeking advice about how to secure your long-term finances could provide you with more freedom later in life. It could also ensure you have the information you need to make informed decisions about your pension now and understand the long-term effects they could have.

Contact us to talk about your pension

Whether retirement is just around the corner or years away, we could help you create a retirement plan that suits your lifestyle and goals. Knowing that your pension has been reviewed by a professional and having someone you can discuss your retirement with could boost your confidence in your long-term plan.

Please contact us to speak to one of our team and arrange a meeting.

Please note:

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

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.