Author: Chris Thorpe

The decision to take out financial protection is often triggered by significant life milestones. However, research suggests that the cost of living crisis and changing lifestyles mean many families are overlooking the importance of a financial safety net. 

Financial protection can provide you with money when you need it most. When it would pay out will depend on the type of financial protection you choose, but it could include if you’re unable to work due to an accident or if you’re diagnosed with a critical illness. 

The payout can mean you’re able to meet immediate or long-term financial commitments if your income stops. It can also give you financial security so you can focus on what’s important, like recovering from an illness. 

A third of under-35s say the rising cost of living is preventing them from getting on the property ladder

People often first think about financial protection when something in their life changes, including reaching traditional milestones. However, changing goals and lifestyles coupled with the rising cost of living means that many millennials are skipping or delaying these events. 

Purchasing a home is often a common trigger for seeking financial protection. It’s easy to see why – a mortgage is normally the largest loan you’ll take out and it’s a huge financial commitment. According to a report in Professional Adviser, 1 in 5 people that have taken out life insurance did so when they purchased a property with a mortgage. 

However, the cost of living crisis is affecting the age younger generations are becoming homeowners.

Almost a third of people under 35 said the rising cost of living has already stopped them from getting on the property ladder. A similar proportion also said that rising costs have either prevented them or will prevent them from moving out of their parents’ house. 

So, many people are missing a key trigger that would lead to them thinking about financial protection. 

Other life milestones may also be triggers for thinking about long-term financial security, such as getting married or starting a family. Again, these milestones are something younger generations are doing later in life or missing altogether as lifestyles change.

According to the Office for National Statistics, the average age to get married has been increasing since the 1970s – it’s now around 38 for men and 36 for women. 

Similarly, the Professional Adviser report also found that 3 in 10 people under 35 are delaying starting a family because of the cost of living crisis. 

If a financial shock could affect your plans, protection could provide security 

While life milestones have traditionally led to people seeking information about financial protection, that doesn’t mean it can’t add value in other circumstances.  

You may not have a mortgage, for example, but you could still face significant financial commitments, including rent. Or you may not have children, but want to take steps to ensure your partner would be financially secure if you passed away. 

If you could struggle to meet your outgoings or maintain your lifestyle if you faced a financial shock, reviewing your safety net is worthwhile. It can give you peace of mind and improve your long-term security.

Financial protection could support other steps you’ve taken to boost your financial wellbeing, like creating an emergency fund. 

Which type of financial protection is right for you?

There are several different types of financial protection to choose from. You can also select the deferment period and level of cover. So, it can be difficult to know which option is right for you and the security it would provide over the short or long term. We’re here to help.

Please get in touch if you want to understand how financial protection could provide a vital safety net for you, with your priorities and concerns in mind.

Please note:

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

Note that life insurance plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.

Rishi Sunak is reportedly drawing up plans to provide a “midlife MOT” to assess the financial health of workers and retirees. Taking stock of your finances in your 40s and 50s could lead to greater financial freedom in the future. Read on to discover five initial steps you can take to review your wealth. 

Sunak’s plans are focused on encouraging people to get back to work as employment figures are still not back to the levels they were before the Covid-19 pandemic. Early retirees that gave up work during the pandemic are now feared to be hampering the UK’s economic recovery.

There are also concerns that some early retirees made the decision based on assumptions about their finances before the cost of living crisis. Over the last year, inflation has been high and it could mean some retirees face a financial shortfall now or in the future.

While Sunak’s plans are designed to encourage more people to join the workforce, a midlife MOT can be useful for keeping your plans on track.

Your mid years are often crucial for building wealth that could mean you are financially secure in the future. So, taking stock now is a worthwhile task.

Here are five areas you should cover in your financial midlife MOT.  

1. Review outstanding debt

Reducing your expenses as you near retirement could provide far more financial freedom. One key way of doing this is to create a plan to reduce outstanding debt.

One of the largest debts you have is likely to be your mortgage. If you can, a plan to own your home outright when you retire can significantly reduce the income you need. Paying off credit cards or loans could also boost your disposable income in the future. 

Having debt, including a mortgage, doesn’t mean you can’t retire, but you should factor repayments into your budget when assessing the income you need. 

2. Assess your savings 

Spend some time assessing your savings and understand if they would provide a safety net if you faced a financial shock, like an unexpected property maintenance bill or being unable to work due to an illness. 

Having savings to fall back on when you need them can provide vital financial security now and in the long term. It means you could weather financial shocks and you don’t have to dip into other assets that you earmarked for other goals. 

As the Bank of England has increased interest rates, it’s worth shopping around to see if you’re getting the most out of your money. 

3. Look at your investment portfolio 

Regularly reviewing your investment portfolio can help you understand how it’s performing – remember to review returns with a long-term view, rather than focusing on how the value of investments have changed over weeks or months. 

It’s also a good opportunity to ensure your portfolio continues to reflect your goals. Changes to your circumstances or aspirations could mean adjustments to your investments make sense. 

If investing isn’t something you’re already doing, it could help you reach long-term goals. 

While investing does involve risk and the value of investments can fall, historically, markets have delivered returns over longer time frames. So, if you’re saving for a goal that is more than five years away, investing could grow your wealth and help your assets keep pace with inflation.

When you invest, it’s essential you consider the level of risk that’s appropriate for you and your circumstances. 

4. Set out your retirement plans

When you think about retirement planning, it may be finances and pensions that come to mind. However, when and how you want to retire are crucial pieces of information if you’re to create a reliable retirement plan.

Set out what your retirement plans are – do you want to phase into retirement by working part-time? Or are you hoping to retire early? 

You should also consider what you want your lifestyle to look like when you give up work. This can be useful for understanding the income you need your pension and other assets to deliver to reach your goal. 

5. Check if you’re on track to reach your pension goal

With a clearer understanding of your retirement plans, you can review your pension – are you on track to have enough to live the retirement lifestyle you want?

It can be difficult to understand how the value of your pension will change between now and retirement, and what the value needs to be to provide financial security. As well as considering what contributions you’ll make, you may also need to consider things like investment returns. So, working with a financial planner here can be valuable. 

Going through your pension now could uncover potential gaps and provide an opportunity to fill them. 

Get in touch to arrange your midlife MOT

A financial review can help you take stock of where your finances are now and the steps you could take to reach your goals. 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 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 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.  

ISAs are a vital part of effective financial planning for many people. According to official statistics, around 12 million adults deposited money in an ISA during 2020/21. 

Around 66% of these accounts hold cash, while the rest are Stocks and Shares ISAs. In total, consumers added £72 billion to ISAs during the year.

Under current rules, you can add up to £20,000 to ISAs each tax year. You can place the money in a Cash ISA to earn interest, or invest through a Stocks and Shares ISA. ISAs are tax-efficient, so you won’t need to pay Income or Capital Gains Tax (CGT) on the interest or returns you receive. As a result, they can be a useful way to reduce your overall tax liability.

Now, however, a think tank is calling for changes that could make them less tax-efficient. Find out why the organisation wants to change how much you could save in an ISA and whether it’d affect your plans here.

The think tank report proposes a £100,000 cap on ISAs

While there is a limit to how much you can deposit each tax year into an ISA, there isn’t a lifetime allowance. This is what a new report is calling for.

The report from the think tank Resolution Foundation and charity abrdn Financial Fairness Trust calls on chancellor Jeremy Hunt to reduce the total amount people can tax-efficiently save or invest through an ISA to £100,000. 

The report claims this would cut waste and focus the government’s savings policy on getting more people to save, rather than rewarding those that already have a significant nest egg. 

The report found the wealthiest tenth of families own 29% of ISA savings.

Wealthier families are also more likely to benefit financially from using the Lifetime ISA (LISA) allowance. The LISA aims to help first-time buyers save a deposit. Each tax year, savers with a LISA can add up to £4,000 and receive a 25% government bonus. The report estimates that 47% of the £670 million of government support given through LISAs is going to the richest fifth of households. 

The report also notes that ISAs are set to cost £4.3 billion each year in forgone tax revenue by the end of 2023/24. So, how do you benefit from saving or investing through an ISA? 

How much do you save in tax by using an ISA?

How much tax you could be liable for if you moved your savings or investments from an ISA will depend on a range of factors, including your income and other assets.

Savings outside of an ISA may be liable for Income Tax

The combination of the Personal Savings Allowance (PSA) and ISA annual subscription limit means that most people don’t need to consider paying tax on the interest their savings earn. 

The PSA is how much interest you can earn before Income Tax is due. For the 2023/24 tax year:

• Basic-rate taxpayers have a PSA of £1,000
• Higher-rate taxpayers have a PSA of £500
• Additional-rate taxpayers do not have a PSA. 

So, if ISA rules changed, some savers could find they need to start paying Income Tax on interest earned if they exceed the PSA or don’t benefit from it. 

Investments outside of an ISA may be liable for Capital Gains Tax

Investments that aren’t held in a tax-efficient wrapper, such as an ISA or pension, could be liable for CGT. This is a tax you pay when you make a profit when you dispose of certain assets.

Each tax year, you can make a certain amount before CGT is due – this is known as the “annual exempt amount”. For the 2023/24 tax year, you can make up to £6,000 before CGT is due, but this allowance will fall to £3,000 in 2024/25.

The rate of CGT depends on which tax band the gains fall into when added on top of your other income. For 2023/24, the CGT tax rates are:

• Standard CGT rate: 10% (18% on residential property)
• Higher CGT rate: 20% (28% on residential property).

As a result, CGT can significantly reduce the amount you make when selling investments. 

So, whether you’re saving or investing, changes to the ISA to implement a cap on the total value could mean some households see their tax bill rise. 

Contact us to create a financial plan you can rely on 

While the government hasn’t announced an ISA cap, you should keep in mind that things can change. It’s important that your financial plan continues to reflect current legislation.

As a financial planner, we’re here to work with you on a financial plan that suits your needs. This includes ensuring you’re up-to-date with changes and understand what they could mean for 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 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.

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 key part of your estate plan is setting out how you’d like to pass on assets to loved ones. There’s more than one option to consider, so read on to find out more. 

Your estate plan should consider how you’ll use your assets during your life and what you’d like to happen to them when you pass away. Last month, we explained what you may need to consider when taking stock of your estate and how the value of your assets may change during your lifetime. This is an important step to understanding your estate and who you’d like to benefit from it.

Now, read on to find out your options when you want to pass on assets. 

3 useful options to consider when passing on wealth

1. Leave an inheritance through a will

A will is a common way to leave assets to loved ones when you pass away. It’s a legal document where you set out exactly how you’d like assets to be distributed. 

There are several different ways you can pass on assets through your will. For instance, you may leave a proportion of your estate to each beneficiary, or you may choose to name specific assets you’d like them to receive. 

Even if your affairs are straightforward, you should still take the time to write a will. Without a will, your assets will be passed on according to intestacy rules, which may not reflect your wishes. Not having a will could also lead to delays in the probate process and conflict among beneficiaries. 

2. Place assets in a trust

A trust can be a useful way to pass on wealth during your lifetime or when you pass away while retaining more control over the assets if you wish to.

A trustee that you choose will manage the assets placed in a trust on behalf of the beneficiary. You can set out how you want the trustee to use or distribute the assets.

You may create a trust for a child and state you want them to have the assets when they reach the age of 25. Or you can set up a trust to provide an income for loved ones without giving them control of the assets held in it.  

Trusts may be right for your estate plan if you want the assets to be used in a specific way, or you want to ensure they remain within the family, for example, to protect assets being lost in a divorce. 

Trusts can be complex, and you may not be able to reverse the decisions you make. So, taking both financial and legal advice before you proceed can be useful and ensure the trust acts in the way you want. 

In some cases, you can use a trust to reduce a potential Inheritance Tax (IHT) bill, as, provided it meets certain conditions, the assets placed in a trust are no longer yours. You may need to consider IHT if the total value of your estate exceeds the nil-rate band, which is £325,000 for the 2023/24 tax year. 

3. Gift assets during your lifetime 

While leaving an inheritance is the traditional way to pass on wealth, gifting during your lifetime could be beneficial too. Not only could you lend loved ones financial support during key moments in their life, but it also means you get to see the impact of your gift. 

According to a report from the Institute for Fiscal Studies, around 5% of adults receive a substantial gift over a two-year period. This rises to around 30% among adults in their 20s and early 30s. 

The research found gifts are most commonly received to mark milestones, such as purchasing a home or getting married, or in response to an unexpected life event, including being widowed. 

When making gifts, it’s essential you consider your own long-term financial security; could gifting mean you have to adjust your lifestyle later in life or that you couldn’t weather a financial shock? Reviewing your financial resilience first means you can feel confident when gifting. 

If your estate could exceed IHT thresholds, it’s important to note that some gifts could be included in your estate for IHT purposes for up to seven years. These are known as “potentially exempt transfers”. 

Some gifts are immediately outside of your estate when calculating IHT, so if you’re thinking about gifting to reduce a tax bill, making use of these could be valuable. Please contact us to talk about gifting and IHT to create a plan that’s tailored to you. 

Contact us to talk about your estate plan

When you’re deciding how to pass on wealth, there’s no right or wrong answer. Your circumstances and priorities play a key role in what makes sense for you. Please contact us if you have any questions about passing on wealth and creating an estate plan you can rely on. 

Read our blog next month to learn more about IHT and the steps you could take to reduce a potential tax bill and leave more to your family. 

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 tax planning or estate planning.

Globally, inflation and recession risks continued to affect markets in November.

Head of the International Monetary Fund (IMF) Kristalina Georgieva suggested that inflation could be nearing its peak.

However, the Organisation for Economic Cooperation and Development (OECD) urged central banks around the world to keep raising interest rates to tackle moderate levels of inflation. So, while some of the pressure may be starting to ease, households and businesses are likely to still face challenges in 2023. 

Remember, while markets may experience volatility, you should focus on your long-term goals. While it is impossible to guarantee returns, markets have historically recovered from downturns. 

UK

Official statistics show that the UK economy contracted by 0.2% in the third quarter of 2022. This means the economy is on the brink of recession. Inflation also increased to another 40-year high in the 12 months to October to 11.1%.

Against this backdrop, new prime minister Rishi Sunak and chancellor Jeremy Hunt delivered the autumn statement. 

In sharp contrast to the mini-Budget delivered just a few months ago under the leadership of Liz Truss, the autumn statement increased taxes. Key changes were made to the Capital Gains Tax annual exempt amount, Dividend Allowance, and the threshold for paying additional-rate Income Tax. 

Hunt also confirmed that the State Pension triple lock would be maintained. This will give pensioners a record rise in income as the State Pension will increase by 10.1% in April 2023. 

In response to high inflation, the Bank of England (BoE) increased its base interest rate again. The rate is now 3% and the highest it’s been since the financial crisis. The central bank also warned that the UK could face a prolonged recession. 

The economic and political turmoil meant that Britain lost its title as Europe’s largest equity market to France. 

The Standard & Poor (S&P) Global Purchasing Managers Index (PMI) for the UK manufacturing sector fell to 46.2 in October. A reading below 50 suggests the sector is contracting and it’s the lowest reading since May 2020 when the pandemic affected operations. The war in Ukraine, weaker demand from China, and ongoing challenges related to Brexit were linked to the downturn.

People reigning in their spending are affecting the retail sector. Data from the Office for National Statistics (ONS) suggests that retail sales are still below their pre-pandemic levels. 

Several high street brands, including Joules and Made, have fallen into administration due to the challenging circumstances. 

The economic uncertainty is affecting households too.

The UK jobless rate increased to 3.6%, according to the ONS, which also found that wages are lagging behind inflation.

A report from think tank the Resolution Foundation found that two decades of wage stagnation is costing the average British worker £15,000 a year. The report suggests that wages will not return to the level before the 2008 financial crisis in real terms until 2027. 

Budgets are being stretched by household essentials. A report from Kantar Worldpanel found that grocery inflation hit 14.7%. This means that the average grocery bill has increased by £682 in a year.

With inflation in mind, it’s not surprising that a GfK report found that British consumer confidence is at a record low. 

Consumer confidence is also affecting the housing market, with many people reluctant to move or increase the amount of debt they have as interest rates rise. 

Figures from Nationwide show that house prices fell by 0.9% month-on-month in October. Many experts are predicting that house prices will fall in 2023. Savills predicts a fall of 10%.

In turn, this is affecting UK builders, as new orders fell for the first time since May 2020, when the first Covid-19 lockdown was in force. 

Europe

The situation in Europe is similar to the UK, with recession risk and high inflation affecting business confidence. 

According to Eurostat, inflation across the eurozone hit 10.6% in the 12 months to October. The energy crisis is the biggest factor pushing up the rate of inflation as prices were 41.5% higher than they were a year ago. There’s also significant variance between the countries that are part of the eurozone. France had the lowest rate of inflation at 7.1%, compared to 22.5% in Estonia. 

Unsurprisingly, concerns are having a knock-on effect on businesses. The S&P Global PMI for manufacturing in the eurozone fell to a 29-month low of 46.4. The reading shows the sector is contracting, which could indicate the region is in recession. 

As Europe’s largest economy, Germany is often used as an indicator of the region. German factory orders fell 4% month-on-month, partly driven by a fall in foreign orders.

This has affected business sentiment. A survey conducted by the Association of German Chambers of Commerce and Industry found that 82% of businesses see the price of energy and raw materials as a business risk. This is the highest since records began in 1985. 

US

Official statistics suggest that inflation in the US is stabilising. In the 12 months to October 2022, it was 7.7% after a slight dip when compared to the previous month.

Figures from the Bureau for Labor Statistics also indicate that businesses are feeling optimistic. Despite economists expecting a drop in the number of job openings, there was an increase of more than 400,000 in September. The findings suggest that businesses are continuing to invest and feel confident enough to expand their workforce. 

Revenue updates from some American companies also paint a positive picture.

Pharmaceutical firm Pfizer raised its 2022 earnings guidance and Covid-19 vaccine sale forecast. It now expects earnings per share to be between $6.40 and $6.50 (£6.20 to £6.30), compared to its previous forecast of $6.30 to $6.45 (£6.11 to £6.25). 

US company Uber also saw its shares rise after it beat revenue forecasts. Year-on-year, revenue increased by 72% to $8.3 billion (£8.05 billion) after lockdowns were lifted. 

On the flip side, Mark Zuckerberg, owner of Meta (formerly Facebook), admitted he had got it wrong and that things were worse than he had expected. The company is set to cut 11,000 jobs, the equivalent of 13% of its workforce.  

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.

Experts are predicting that the UK will face a recession in 2023. While it can be tempting to react to this news by changing your investment strategy, sticking to your long-term plan makes sense for most investors. Read on to find out why.

Several factors are contributing to economic uncertainty, including high inflation and concerns about energy supply. The long-term effects of the Covid-19 pandemic and the ongoing war in Ukraine are two of the reasons for these challenges.

In its November report, the Bank of England said the economic outlook was “very challenging”. It expects the economy to be in “recession for a prolonged period”, adding that inflation was forecast to remain high until mid-2023 when it is expected to fall sharply. 

Other predictions also paint a gloomy picture of the UK economy. 

According to the EY ITEM Club, the economy will contract by around 0.2% each quarter from the final quarter of 2022 until the second quarter of 2023. Overall, it expects the economy to contract by 0.3% in 2023. This compares to a previous forecast that indicated the economy would grow by 1%. 

The organisation noted this is shallow when compared to previous recessions thanks, in part, to the government’s intervention on energy bills. 

Hywel Bell, EY UK chair, added: “There are very significant risks to the forecast, with the potential for further surprises or global instability creating additional drags on growth. Businesses will need to think very carefully about their resilience and plan for different scenarios, while also being mindful of the support they provide to their customers and employees.” 

Similarly, Goldman Sachs has downgraded its growth forecast for the UK, according to a Guardian report. The investment bank now expects the UK economy to shrink by 1% in 2023. 

A recession could lead to market volatility, but history indicates it recovers in the long term

While these predictions can be alarming to an investor, remember, that markets have recovered from previous downturns.

Economic uncertainty can lead to businesses and households tightening their belts, which has a knock-on effect on business profitability and markets. While it’s impossible to predict the markets, history shows us that they have recovered from recessions in the past. 

Take the 2008 financial crisis. In the UK, the recession that followed lasted for five consecutive quarters. During this time, the markets fell, but they went on to recover and grow. Investors that panicked and sold amid the downturn would have turned paper losses into real losses and missed out when markets began to rise. 

Over the next year, your investment portfolio may experience volatility or a fall in value. While all investments carry some risk, looking at how markets have responded to similar events over the long term in the past can give you confidence. 

If you’re tempted to make changes to your investments, here are five things you should do.

1. Focus on your long-term goals

As highlighted above, investment markets have historically delivered returns over the long term. Rather than responding to short-term economic challenges, focus on why you’re investing. 

2. Don’t make knee-jerk decisions

It can be easy to make knee-jerk decisions, especially during investment volatility. But the decisions you make can have a long-lasting effect, so it’s important that they are measured. Taking some time to weigh up the pros and cons can highlight where you could be making a mistake by reacting to short-term volatility. 

3. Review investments alongside your financial plan

Don’t think of your investments in isolation, they should play a role in your overall financial plan. So, if you’re tempted to make changes, review your options in the context of your wider finances and goals.

4. Consider your risk profile before you make changes

Before you make any investment decisions, you need to consider how they could change your risk profile. Choosing risk-appropriate investments is important. Taking too little risk could mean you don’t reach your goals, while taking too much could mean you’re exposed to more volatility. 

5. Speak to us

If you have any questions about the current economic situation or would like to discuss your investment plan, speak to one of our team. We’ll help you understand the effect on your lifestyle and your goals. Whether you want reassurance that your plans are still on track or you’re considering making changes to your investments, we’re here to help. 

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.

While many tax allowances haven’t fallen, they haven’t increased in line with inflation either. In real terms, that means they’re less valuable than they once were. It could affect your income, long-term wealth, and what you leave behind for loved ones.

As the cost of living and the value of some assets rises, the tax breaks you use may not be stretching as far. It means your tax liability may have increased or that you need to review your financial plan.

As potential Inheritance Tax (IHT) bills consider the total value of your estate, the associated allowances can really highlight the effect of inflation. 

The nil-rate band would have increased by more than £135,000 if it matched inflation

The nil-rate band is the threshold for paying IHT. If the total value of your estate is below this, no IHT will be due.

For the 2022/23 tax year, it is £325,000. It’s remained at this level for 13 years. However, according to a report in the Telegraph, if the allowance had kept pace with inflation, it would be worth more than £462,000 today. It would mean that families could leave loved ones more than £135,000 extra without having to worry about IHT.

Yet, while the allowance has been frozen for more than a decade, many of the assets you want to leave behind are likely to have increased in value significantly. 

According to the Land Registry, at the start of 2009, the average home in the UK was worth almost £158,000. 13 years later, the average property price had risen to almost £275,000. As a result, property alone will now use up a significant proportion of the nil-rate band.

If you’re leaving some property, including your main home, to children or grandchildren, you can take advantage of the residence nil-rate band to increase how much you could pass on free from IHT. For the 2022/23 tax year, this is £175,000.

However, both the nil-rate band and residence nil-rate band are frozen until 2028. So, in the current high inflation environment, the value these allowances provide in real terms is likely to fall.

Many of the allowances you can use to pass on assets during your lifetime to reduce IHT haven’t increased either. Assets may be considered part of your estate for up to seven years for IHT purposes, so these allowances could be a vital part of your financial plan.

Among those that haven’t increased are: 

• The annual exemption means you can pass on up to £3,000 worth of assets each tax year without the sum potentially being added to the value of your estate. However, if it had increased in line with inflation, it would be more than £10,000 today.
• Parents can gift their children up to £5,000 on their wedding day without considering IHT. If this allowance had increased at the same pace as inflation, it would be worth almost £35,000 in 2022.

So, while the allowances you make use of may not have changed, the value they add to your financial plan could have fallen. 

It’s not just IHT where frozen allowances could be affecting your wealth and tax liability either. 

3 other allowances that may not be as valuable due to inflation

1. Income Tax thresholds

While the Personal Allowance threshold has increased significantly over the last decade, the higher- and additional-rate Income Tax thresholds haven’t increased at the same rate of inflation. As a result, if your salary has risen, your tax liability is likely to have risen too. 

According to Quilter, if Income Tax thresholds remained frozen for the next five years, someone earning £35,000 would be around £2,000 worse off over the five years. For someone earning £50,000, this rises to more than £9,000. 

During the autumn statement, chancellor Jeremy Hunt announced the income for paying the additional rate of Income Tax would fall from £150,000 to £125,140 in the 2023/24 tax year. As a result, high earners may see their tax liability increase. 

2. Dividend Allowance

Dividends can be a way to boost your income. If you’re a company owner, you may choose to take dividends as payment to supplement a salary, or you may invest in dividend-paying companies.

For the 2022/23 tax year, you can take up to £2,000 in dividends before tax is due. This compares to an allowance of £5,000 a decade ago. Once you factor in inflation, the value the Dividend Allowance offers falls even more sharply.

The Dividend Allowance will fall to £1,000 in 2023/24 and to £500 in 2024/25.  

3. Pension allowances

Both the Lifetime Allowance and Annual Allowance have fallen in the last decade. Again, when you consider inflation, the reduction in value becomes even starker and it could have a significant effect on your retirement savings.

The Annual Allowance limits how much can be added to your pension during a tax year while retaining tax relief. For the 2022/23 tax year, the maximum Annual Allowance is £40,000, and some savers may have a lower allowance. This compares to a maximum allowance of £50,000 in 2012/13.

Similarly, the Lifetime Allowance, which caps the total value your pension can be while retaining tax efficiency benefits, fell from £1,500,000 in 2012/13 to £1,073,100 in 2022/23. 

Making inflation part of your financial plan

When you are making long-term plans, inflation is important to consider. From the value of allowances to how to manage your savings, the rising cost of living may affect your decisions.

Please get in touch with us to discuss how to make inflation part of your decision-making process.

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 estate or tax planning. 

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.

When you’re thinking about your financial plan, what are your priorities? Often, passing on wealth and helping children or grandchildren realise their own goals is important. 

Despite a period of economic uncertainty, a survey from Scottish Widows found that 77% of UK households are still planning for the financial wellbeing of other generations. This could include children and grandchildren, as well as older relatives that may need additional support. 

If you want to focus on creating long-term financial security for your family, here are seven important steps to take. 

1. Build up your emergency fund

To achieve long-term financial security, you need to have a solid foundation. If you don’t already have an emergency fund, it’s a good place to start.

Having three to six months of expenses in an easy access account can provide a safety net if your income temporarily stops or you face a bill. It can help ensure you can continue to meet financial commitments even if the unexpected happens, including things like contributing to a nest egg for your child’s future. 

An HSBC study found that the average emergency fund balance is £7,606. However, 18% of people had £1,000 or less. 

You should go through your budget to calculate a target for your rainy day fund. 

2. Assess if financial protection could provide peace of mind

Unexpected financial shocks can knock even the best-laid plans off course. An emergency fund can provide some peace of mind, but for larger shocks, financial protection can be useful.

Depending on the type of financial protection you pick, it could pay out if you’re unable to work due to an accident or if you’re diagnosed with a critical illness. Other options, such as life insurance, could provide your family with money if you pass away. 

Appropriate financial protection can help your family manage their finances even if the worst happens. 

3. Start saving on your child’s behalf

It’s never too soon to start building a nest egg for your child. 

If you start putting money away while they’re still young, it has longer to earn interest. It can also make regular contributions part of your budget and more manageable. 

A nest egg can help children start engaging with money and understand why saving is important from an early age. It could also support their goals, such as going to university or buying their first car.

One thing you need to consider is what type of account to choose. An easy access children’s account can be valuable if you want to use the money in the short or medium term. In contrast, they wouldn’t be able to access the money saved in a Junior ISA (JISA) until they were 18. 

4. Consider investing for their future

If you want to save for your child with a long-term view, investing could make sense. 

While returns cannot be guaranteed, investing could provide you with a way to grow the nest egg you’re building. It could be an option to consider if you have a goal in mind that’s further than five years away, such as helping them to buy a home.

When investing, it’s important to understand the risks and to choose options that are right for your risk profile. 

5. Talk about finances with your family

Helping your children financially doesn’t have to mean giving them money – knowledge can be invaluable too.

Talking about finances can be really useful. From discussing saving pocket money with young children to helping adult children navigate saving into a pension, simply having someone to discuss finances with can help create long-term financial security.

It’s an approach that can mean they make better decisions and are comfortable seeking support if they need it.

6. Write your will and commit to reviewing it

Writing a will is the only way to ensure your assets are passed on to who you want. Don’t assume your wealth will automatically go to your children, as this isn’t always the case. 

A will means you can set out who you want to benefit from your estate and specify what you’d like them to receive. 

While you can write your own will, it’s often advisable to seek legal advice, especially if your circumstances are complex. This can minimise the chance of mistakes occurring.

As your circumstances change, your wishes may do too. So, commit to reviewing your will regularly and updating it if necessary. 

7. Calculate if Inheritance Tax could affect your estate

The standard rate of Inheritance Tax (IHT) is 40%. So, if the value of your entire estate exceeds certain thresholds, it could reduce what you leave behind for your family. However, there are often steps you can take to reduce an IHT bill if you’re proactive.

The nil-rate band is £325,000 for the 2022/23 tax year – if the value of your estate is below this threshold, it will not be liable for IHT. If you leave your main home to your children or grandchildren you can also use the residence nil-rate band, which is £175,000 for the 2022/23 tax year.

As a result, many people can pass on up to £500,000 before IHT is due. If you’re married or in a civil partnership, you can also pass on unused allowances. This means if you plan with your partner, you may be able to pass on up to £1 million before IHT is due. 

Effective estate planning could help you make the most of other allowances to pass on as much as possible to your family. 

Contact us to talk about your family’s financial security 

While the above seven steps can help improve your child’s financial security, your plan should be tailored to you and there are often other things you can do. Please contact us to arrange a meeting and discuss what steps you could take.

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.

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

Note that financial protection plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.

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.