Inflation remains the key battle for your finances

A day before the autumn statement, official data showed UK inflation hit a 41-year high of 11.1%. So it came as no surprise that Chancellor Jeremy Hunt said his main aim was to help the Bank of England defeat domestic price rises, which are expected to remain at 7.4% next year.

But this only serves to highlight the lack of inflationary hikes in tax-free benefits for savers and investors. The chancellor seems to think that anyone with excess savings falls into the category he describes as having “broader shoulders,” justifying his cuts to dividends and capital gains tax credits.

Does this set the tone for further reduction of our precious allowances? I’m afraid so.

The standard lifetime pension benefit has been £1,073,100 since 2020 and remains frozen, penalizing successful investment strategies and those who are committed to contributions. Similarly, the Annual Pension Allowance has remained stuck at £40,000 since 2014 and the Individual Savings Account Annual Allowance of £20,000 has not increased since April 2017.

If you didn’t get an inflationary pay raise, you would protest. And it should be the same with the allowances provided to help you pay for your retirement. Then write to your PM.

In the meantime, if you haven’t managed to clean up your spring or summer finances, then autumn may be a good time to take stock, mitigate the damage caused by frigid tax evasion and stealthy lockdowns, and consider how to stop inflation from erode your finances. money.

On the one hand, the tax situation is not as bad as it might seem – allowances remain generous and HMRC statistics show they are rarely used to the fullest. In addition, the chancellor caved in to pressure on the pension income foundation: reinstate the triple freeze on the state pension, meaning the benefit will increase by 10.1% in April.

But there are no guarantees that the triple lock will remain intact for a second year. Although the Bank of England has forecast that inflation could fall to 7.9% by the third quarter of next year, keeping the triple lockdown in place for 2024 will remain costly. If inflation remains high, I fail to see how giving retirees inflation-linked raises is sustainable when nurses and other public sector workers strike for the equivalent.

And while the clerk gives with one hand, he takes away (some) with the other. Freezing income tax thresholds at a time of skyrocketing inflation is a stealthy way to raise more taxes from all age groups.

The combination of the state pension rising to £10,000, plus inflation-linked increases to public and private sector workplace pensions, means at least half a million more over-65s will have to pay income tax, according to calculations LCP extension.

Meanwhile, there is a government state pension age review coming in January 2023. Anyone under 50 should expect the start date for their state pension to be moved up to 70, and in the case of those under 45 , possibly at 75 years old.

This is all the more reason to invest now to close the gap. And to use the Isas, which not only protects savings from tax on dividends and capital gains, but will not even be subject to a tax increase in retirement.

If you are very well off or have received a windfall, remember to also use your spouse’s allowances and consider the Junior Isa allowances for children, set at £9,000 per annum.

Investors with taxable investments can use the Bed and Isa concessions — to sell tax-free and then reinvest via the tax shelter — to mitigate cuts in capital gains and dividend allowances. In addition, taxpayers with higher tax rates can transfer taxable investments to family members in lower tax brackets.

Anyone nearing retirement should also consider maximizing their retirement contributions, as early tax relief generates a return on investment that can help beat inflation.

Higher-rate taxpayers still benefit from full upfront tax relief on their pensions, so use it while it lasts, as a flat rate of 30% for all has been proposed as a way to treat lower incomes more fairly.

Also, ask for a pay raise, and remember that anything less than inflation will have a knock-on effect on your retirement contributions, including those from your personal income and the government and your employer.

High inflation means you can also see the value of your cash savings erode, so make sure your deposits are working as hard as possible. Savings comparison website Moneyfacts.co.uk opts for the 18-month fixed rate deposit from Union Bank of India (UK) Ltd, paying 4.55%, and the 120-day notice account from Gatehouse Bank, paying 3%. Another way to keep up with rate changes is to use a savings platform, such as Hargreaves Lansdown Active Savings.

But despite the difficult time for markets, a new survey from Interactive Investor has found that more than two-thirds (67%) of investors believe now is a good time to invest.

Hargreaves Lansdown says it has seen growing interest in resource and energy funds benefiting from rising commodity prices, and its top fund sector in the month before the fall statement was North America.

Meanwhile, the FTSE 100 offers exposure to sectors that show resilience in more challenging economic times, such as consumer staples, healthcare and utilities. Large UK companies in these sectors look cheap by historical and other developed market valuations. Many also offer a high dividend yield.

In theory, some assets offer built-in inflation protection, such as infrastructure, property, and index-linked bonds. However, the risk is that any benefit from their inflation-linked income is undermined by the “downgrade” of their prices caused by higher interest rates.

So if you already have a well-structured and diversified investment portfolio across industries, geographies and asset classes, I would ignore the market noise, keep my cool and move forward.

Focus on what you can control, such as the cost of what you pay to invest. Switching to cheaper funds and low-cost investment platforms can significantly increase returns when savings are built up over several decades. It could be your most powerful weapon in the fight against inflation.

But, if your investments fail, perhaps reconsider your plans to leave a legacy. Many millennials would rather their parents focused on maintaining cash reserves to fund a comfortable retirement and help with the cost of living, than pass on too much.

Or think about scaling. Halifax says moving to a smaller one-bedroom house would, on average, raise £120,820. This is a useful safety net if future tax policies spell more trouble for your finances.

Moira O’Neill is a freelance writer on money and investing. Chirping: @MoiraONeillInstagram @MoiraOnMoneye-mail: moira.o’neill@ft.com

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