Inflation remains the main battle for your finances

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

But this only serves to highlight the lack of inflationary increases in tax-free allowances for savers and investors. The chancellor seems to think anyone with excess savings falls into the category he describes as “broadest of shoulders” – justifying his dividend and capital gains tax cuts.

Does this set the tone for a further reduction of our valuable rights? I’m afraid so.

The standard lifetime pension benefit has stood at £1,073,100 since 2020 and remains frozen, penalizing both successful investment strategies and those committed to contributions. Similarly, the annual pension allowance has stalled at £40,000 since 2014, and the annual individual savings account allowance of £20,000 has not increased since April 2017.

If you didn’t get an inflationary raise, you’d protest. And it should be the same with the benefits provided to help you pay for your retirement. So write to your MP.

Meanwhile, if you haven’t gotten around to spring or summer cleaning your finances, fall can be a good time to take stock, mitigate the damage from icy tax grabs and secret freezes, and reflect thinking about how to prevent inflation from eroding your money. money.

On the one hand, the tax situation isn’t as bad as it might seem – allowances remain generous and HMRC statistics show they’re not often maxed out. In addition, the chancellor succumbed to the pressure on the foundation of pension income: recovery of the triple lock of the state pension, which means that benefits will rise by 10.1 percent in April.

But there are no guarantees that the triple lock will remain untouched for a second year. While the Bank of England has forecast that inflation could fall to 7.9% in the third quarter of next year, it remains expensive to maintain triple lock for 2024. If inflation remains high, I don’t see how it is sustainable to give pensioners inflation-linked benefits if nurses and other public sector workers strike for the equivalent.

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

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

Meanwhile, in January 2023, the government will review the state pension age. Anyone under the age of 50 can expect the starting date of the state pension to be moved to the age of 70 and, in the case of young people under the age of 45, possibly to the age of 75.

That is even more reason to invest now to close the gap. And to use Isas, which not only protects savings from dividend and capital gains taxes, but also won’t be subject to tax grabs in retirement.

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

Investors with taxable investments can take advantage of Bed and Isa’s facilities – to sell tax-free and then reinvest through the tax shelter – to mitigate capital gains cuts and dividend payments. In addition, taxpayers with a higher rate can transfer taxable investments to family members in lower tax brackets.

Anyone approaching retirement should also consider maximizing their retirement contributions, as the upfront tax credit generates a return on investment that can help beat inflation.

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

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

High inflation means you’ll also see the value of your cash savings decline – so make sure your deposits are working as hard as you can. Savings comparison website Moneyfacts.co.uk chooses Union Bank of India (UK) Ltd’s 18 Month Fixed Rate Deposit, which pays 4.55 percent, and Gatehouse Bank’s 120 Day Notice Account, which pays 3 percent. Another way to keep up with changing rates is to use a savings platform such as Hargreaves Lansdown Active Savings.

But despite the challenging time for the markets, a new Interactive Investor poll shows that more than two-thirds (67 percent) of investors think now is a good time to invest.

Hargreaves Lansdown says it has seen increased interest in resources and energy funds that benefit from rising commodity prices, and North America was the leading sector in the month leading up to the fall statement.

Meanwhile, the FTSE 100 offers exposure to sectors showing resilience in tougher economic times, such as consumer staples, healthcare and utilities. Large UK companies in these sectors look cheap compared to historical valuations and those in other developed markets. Many also offer a high dividend yield.

In theory, some assets offer built-in inflation protection, for example infrastructure, real estate and index-linked bonds. However, there is a risk that any benefits from their inflation-linked income will be undermined by the “derating” of their prices due to higher interest rates.

So if you already have a well-structured investment portfolio diversified by sector, geography and asset classes, I would ignore the market noise, stay calm and carry on.

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

But if your investments do fall short, perhaps rethink your plans to leave a legacy. Many millennials would rather their parents focus on keeping cash reserves to fund a comfortable retirement and help with living expenses, rather than spending too much.

Or think about budget cuts. Halifax says moving into a one-bedroom house smaller would mean an average of £120,820. That’s a handy safety net if future tax policies will hurt your finances more.

Moira O’Neill is a freelance writer on money and investments. Twitter: @MoiraONeillInstagram @MoiraOnMoneye-mail: moira.o’[email protected]

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