Being in the business we’re in, it is pretty clear that we think financial planning is incredibly important. There’s a clue in our name too. While we believe that keeping a careful watch over your finances is crucial at any given time, in these particularly challenging days, good financial planning matters more than ever.
Uncertainty still reigns supreme around the world as the pandemic goes on, and here in the UK we have to deal with the extra complications caused by Brexit. We see panicked headlines about a supply chain crisis and adjust to life with petrol shortages, energy price hikes and empty supermarket shelves and as the government’s furlough and other COVID-19 financial safety nets end, households and businesses across the UK are finding themselves under even more pressure.
Then we’ve got inflation still on the rise, creeping over 3.1% for the first time in four years, with expectations that it will hit 4% by the new year. In our last newsletter, we talked about how a well-managed portfolio can manage this threat, and this very much still applies (more on that later).
A taxing problem
The tax landscape is looking just as challenging. It has been an especially expensive couple of years for the government, with an estimated bill of around £350 billion for COVID measures alone. It comes as no surprise, then, that taxes will be going up to recover costs.
In the recent Budget, Chancellor Rishi Sunak confirmed £40 billion of tax increases from April 2022, including £12 billion from the 1.25% tax rise in National Insurance contributions to help fund health and social care. There will be the same increase for dividends tax, giving the UK the highest tax burden since 1950.
Even without the exceptional circumstances of a global pandemic, the gap between tax revenue and state healthcare costs is only set to widen. A demographic shift, with a longer life expectancy and a lower birth rate, is changing the shape of the UK. Today, the biggest slice of the population – at 14 million – is the ‘baby boomer’ generation, born between 1946 and 1964. With many retired (or soon to retire), this increasingly depletes the government’s tax coffers as millions exit the labour market.
Meanwhile, the health and social care needs of this most populous generation will become greater as they age, putting more strain on the system. Who will foot the bill? The government’s 1.25% increase on earned income for both workers and employers will be “legally ring-fenced” for this purpose, to be formalised as the Health and Social Care Levy in 2022 but it won’t be enough.
With Boris Johnson insisting he won’t cover the shortfall with more borrowing, it will have to come down to higher taxes. If you’re not making time for effective tax planning over the next 15 years, you could find you’ll be paying a lot more to HMRC than you’d like.
Battle of the bulge: an ageing UK population
– Between 1901 and 2010, the number of people aged 40+ trebled from 9.7 to 30.8 million
– In 2012, the number of people aged 65+ breached 10 million for the first time
– Almost a quarter of the UK will be aged 65+ by 2042
– The number of people of pensionable age will be 360 per 1,000 people of working age in 2043, compared to 295 in 2018
– By 2043, the population aged over 85 will reach 3 million, almost double the number in 2018
This population pyramid shows that in 2043, the ‘bulge’ – the peaks representing the largest age groups – will have shifted 25 years higher up the age scale. The group projected to grow the most will be people of pensionable age – aged 67 and over – increasing by 3.6 million, or 30% from 2018.
What can you do about it?
One of the most straightforward things you can do to minimise the effect of higher taxation is to take advantage of all the available allowances and reliefs. Where you put your money makes a real difference. In the face of increasing dividends tax, for example, you can make your money go further by maximising your tax-free allowances for pension and ISA contributions before looking to invest.
Let’s say you earn £100,000 a year and have built up £40,000 in savings. If you had put that money into a pension instead, you would have benefited from higher rate tax relief at 40%, boosted further with a salary sacrifice arrangement. From April 2022, that approach will save you 3.25% in National Insurance – representing a tax saving of £21,300! With careful tax planning, you would have just halved your cost of investing.
When it comes to higher inflation, investing in equities in the long-term is a key way of helping your returns outpace the cost of living. You can rest assured that we keep a careful eye on all our WRAPS™ portfolios to make sure they continue to deliver the best returns possible given the conditions, adjusting only where we can see the benefits of doing so.
Knee-jerk reactions to external events and sensationalist headlines are not the way to get you the best results. For that, you need a long-term plan, looking at your whole financial picture in relation to your unique situation, needs and goals. That’s the way to map out how you can live your best life – that’s good financial planning.
In this video, George Kinder explains how client-focused financial planning stands apart from other forms of financial advice.
Keeping on track
As a client of ours, you’ll know that at Wealth Matters we believe financial planning is about more than just numbers. We work with you to really understand your needs so we can use our expertise to help you make the most of what you have, no matter what’s going on around you.
These may be particularly unusual times, but there’s always good cause to stay on top of your financial planning. Inflation, markets, tax rules and other external factors are subject to change at any time, but even if they stayed static, your life doesn’t stay still. A regular review gives you the space to check in on what’s happening in your life, your family and the wider world so you can continue meeting your needs and goals as time goes on.
While there are straightforward ways we can improve your financial situation, like helping you take advantage of tax reliefs, we’re here to add more value through specialist, bespoke planning.
Time to reflect on your life and financial situation? Contact us to arrange a call.