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April 2019

Cost of Inflation

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Eroding the purchasing power of your money

The impact of the cost of inflation on savings and investments, especially of those retirees living on a fixed income, is an important issue. But it’s also not good news for other savers and investors, as it can erode the purchasing power of money.

Inflation is officially defined as the sustained rise in the general level of prices of goods and services in the economy. On a basic level, the buying power of an individual pound decreases when the price of everything has increased. Low interest rates also don’t help, as this makes it even harder to find returns that can keep pace with inflation and rising living costs.

Different factors

If inflation becomes too high, the Bank of England may increase the bank rate to encourage us all to spend less and to save more. They can use the bank rate (the interest rate it sets) to control inflation. The higher the rate, the more incentive individuals and businesses have to save rather than borrow money, meaning they’ll receive higher returns from their savings but have to pay more for any loans.

There are a number of different factors which may create inflationary pressures in an economy. These include rising commodity prices that can have a major impact, particularly higher oil prices, which translates into steeper petrol costs for consumers.

Volatile periods

Investments are usually a better option than cash savings if you want to protect or grow the real value of your money, although it is still worthwhile holding some of your assets in cash as opposed to investments, as this will help to protect your money during more volatile periods.

Historically, investments such as shares and bonds have outperformed cash – particularly over long periods, although remember that past performance isn’t a guide to future performance. So if you’re saving for your retirement, investing can put you in a stronger financial position and put you on track towards your dream retirement.

Inflation protection

Different asset classes provide varying degrees of protection against inflation. Equities are often cited as being one of the best long-term defences. Intuitively, this makes sense. On a basic level, by investing in shares of companies, as the price of goods rises so too do the profits the companies earn on those goods, and in turn the returns to shareholders.

So although they have the potential to be more volatile, stock market investments have historically performed well, benefiting from the earnings of companies usually rising along with inflation and reinvesting dividends. It is these dividends that help in the battle to beat inflation, particularly when returns compound.

Stock market

Changes to pension legislation in more recent years have given us all more freedom about how we use our pension pot and when we take that money. This means you can leave your money invested until you’re ready to take it, and then release it gradually, rather than being at the mercy of stock market performance on the day of your retirement.

This also means that you’re giving your money more opportunity to grow in value and to beat the cost of inflation.

ISAs guide

Guide to Individual Savings Accounts

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The little allowance with big potential

Individual Savings Accounts (ISAs) are an incredibly effective means of shielding your money from both Capital Gains Tax and Income Tax. Using your tax-free allowances every year should be a standard part of your financial planning.

Each tax year, we are each given an annual Individual Savings Account (ISA) allowance. This can build up quickly, letting you accumulate a substantial tax-efficient gain in the long term.

It is a ‘use it or lose it’ allowance, meaning that if you don’t use all or part of it in one tax year, you cannot take that allowance over to the next year. Utilising your ISA allowance to invest tax-efficiently could lead to significant savings in Capital Gains Tax and even improve your potential returns.

Q: What is an ISA?

A: An ISA is a ‘tax-efficient wrapper’ designed to go around an investment. Types of ISA include a Cash ISA and Stocks & Shares ISA. A Cash ISA is like a normal deposit account, except that you pay no tax on the interest you earn. Stock & Shares ISAs allow you to invest in equities, bonds or commercial property without paying personal tax on your proceeds.

Q: Can I have more than one ISA?

A: You have a total tax-efficient allowance of £20,000 for this tax year. This means that the sum of money you invest across all your ISAs this tax year (Cash or Stocks & Shares) cannot exceed £20,000. However, it’s important to bear in mind that you have the flexibility to split your tax-free allowance across as many ISAs and ISA types as you wish. For example, you may invest £10,000 in a Stocks & Shares ISA and the remaining £10,000 in a Cash ISA. This is a useful option for those who want to use their investment for different purposes and over varying periods of time.

Q: When will I be able to access the money I save in an ISA?

A: Some ISAs do tie your money up for a significant period of time. However, others are pretty flexible. If you’re after flexibility, variable rate Cash ISAs don’t tend to have a minimum commitment. This means you can keep your money in one of these ISAs for as long – or as short a time – as you like. This type of ISA also allows you to take some of the money out of the ISA and put it back in without affecting its tax-efficient status.

On the other hand, fixed-rate Cash ISAs will typically require you to tie your money up for a set amount of time. If you decide to cut the term short, you usually have to pay a penalty. But ISAs that tie your money up for longer do tend to have higher interest rates.

Stocks & Shares ISAs don’t usually have a minimum commitment, which means you can take your money out at any point. That said, your money has to be converted back into cash before it can be withdrawn.

ISAs guideQ: What is a Help to Buy ISA?

A: A Help to Buy ISA is an ISA designed to help first-time buyers save up a deposit for their home. The Government will add 25% to the savings, up to a maximum of £3,000 on savings of £12,000. If you pay into a Help to Buy ISA in the current tax year, you cannot also pay into another Cash ISA.

Q: Could I take advantage of a Lifetime ISA?

A: You must be 18 or over but under 40 to open a Lifetime ISA. You can use a Lifetime ISA to buy your first home or save for later life. You can put in up to £4,000 each year until you’re 50. The Government will add a 25% bonus to your savings, up to a maximum of £1,000 per year.

Q: What is an Innovative Finance ISA?

A: An Innovative Finance ISA allows individuals to use some or all of their annual ISA allowance to lend funds through the Peer to Peer lending market. Peer to Peer lending allows individuals and companies to borrow money directly from lenders. Your capital and interest may be at risk in an Innovative Finance ISA and your investment is not covered under the Financial Services Compensation Scheme.

Q: Is tax payable on ISA dividend income?

A: No tax is payable on dividend income. You don’t pay tax on any dividends paid inside your ISA. Outside of an ISA, you currently receive a £2,000 dividend income allowance.

Q: Is Capital Gains Tax (CGT) payable on my ISA investment gains?

A: You don’t have to pay any CGT on profits. You make a profit when you sell an investment for more than you purchased it for. If you invest outside an ISA, excluding residential property, any profits made above the annual CGT allowance for individuals (£12,000 in 2019/20 tax year) would be subject to CGT. For basic rate taxpayers, CGT is 10% or more. For higher and additional rate taxpayers, CGT is 20%.

Q: I already have ISAs with several different providers. Can I consolidate them?

A: Yes you can, and you won’t lose the tax- efficient ‘wrapper’ status. Many previously attractive savings accounts cease to have a good rate of interest, and naturally some Stocks & Shares ISAs don’t perform as well as investors would have hoped. Consolidating your ISAs may also substantially reduce your paperwork. We’ll be happy to talk you through the advantages and disadvantages of doing it.

Q: Can I transfer my existing ISA?

A: Yes, you can transfer an existing ISA from one provider to another at any time as long as the product terms and conditions allow it. If you want to transfer money you’ve invested in an ISA during the current tax year, you must transfer all of it. For money you invested in previous years, you can choose to transfer all or part of your savings.

Q: What happens to my ISA if die prematurely?

A: The rules on ISA death benefits allow for an extra ISA allowance to the deceased’s spouse or registered civil partner.

If you’re looking for ways to grow the value of your wealth for the longer term, investing through an appropriate ISA provides the potential to do this and has the added benefit of protecting the gains you make from both Income Tax and Capital Gains Tax.

If you would like to review your situation or discuss the options available, please contact us for further information – we look forward to hearing from you.

Millennials Get Real With The Numbers

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Making Sacrifices For Home Ownership Over Retirement

Millennials are chasing the home ownership dream at the potential cost of a lower income in retirement, new research[1] shows.

Over a third (35%) of millennials say they prioritise saving for a deposit on a home instead of their retirement. Nearly a fifth (19%) say buying a house is the main reason they don’t save more into their pension, while 10% say student debt stops them saving into a pension. One in 11 (9%) admits that frequently changing jobs affects their ability to make regular pension contributions.

Millennials seem willing to make sacrifices for home ownership, with one in ten (10%) living with parents instead of renting to help save more money for a home. The study found men are almost twice as likely (20%) to be heading home compared to women (11%).

Bank Of Mum And Dad

Despite worries about graduate debt and the squeeze on wages, on average, nearly a third (31%) expect to buy their first property by the age of 30, with men (39%) more confident than women (26%) they’ll achieve their ambition. However, the research shows they won’t all have to save hard – an optimistic 20% expect to receive financial aid from the Bank of Mum and Dad.

Industry data[2] shows millennials are right to be hopeful about home ownership – around 365,600 first-time buyers completed mortgages in the year to July 2018, borrowing a total of £59.9 billion. The average age of the first-time buyer during the year was 30, borrowing an average £145,000 on a gross household income of £42,000.

But pensions are feeling the strain. The research found around 21% say they have not started saving for retirement yet, while 15% say pension saving does not motivate them, and 12% believe pensions are irrelevant to millennials.

Focused On Home Ownership

Retirement can seem daunting for millennials and is, of course, a long way off when you are contending with student debts and high rents. However, it is crucial to start saving for your pension as early on as possible, putting away as much as you can each time.

It is easier if you start doing this as soon as you start working, so you get used to the money going straight into your pension pot. Many will, at least, be saving through the workplace, which is a good start, and contributions should be regularly reviewed to ensure a significant fund can be built up.

Not all millennials, however, are focused on home ownership. According to the survey, approximately 17% of under-35s say buying a house is a not a realistic option at present, while 11% say that saving for a house deposit is not a financial priority. And it is not just millennials, as the research shows that one in seven 35-54-year- olds have given up on the hope of ever owning a home.

Don’t Let Saving Become A Daunting Prospect

Juggling buying a house with saving for retirement is no doubt a challenge, and it is inevitable that something may get dropped, which unfortunately appears to be retirement saving. However, it is important to start saving for your pension as early on as possible. To find out how we can help, please contact us – we look forward to hearing from you.

Source data
[1]Consumer Intelligence conducted an independent online survey for Prudential between 20 and 21 June 2018 among 1,178 UK adults