The debt built on during this pandemic creates an environment where good financial planning from trained professionals will be more vital than ever.
The Covid-19 pandemic has raised the stakes for both borrowers and savers in the United Kingdom It has triggered a wave of sharp inflation that is likely to raise interest rates for borrowers, pushing up mortgage costs even as house prices continue to rise. This comes of course as energy prices are also rising and the government’s promise of cheap energy deals if we shop around is found to be hollow as challenger energy providers go bust one by one.
These rising costs risk putting young people off making their first move into the housing market for even longer and will force more parents and grandparents to consider using their own savings to help fund younger generations getting started in life. The bank of mum and dad remained open for the pandemic. For savers the key issue is that it has left the government strapped for cash and keen to find lowprofile ways of raising tax revenue without disrupting economic growth.
The first evidence of this came in the budget in April 2021 when the chancellor announced that he is freezing the amount of money that can be saved tax-free in a pension, known as the Lifetime Allowance. The sum it is frozen at, £1,073,100, is a substantial sum for many however it will not change until April 2025. During this period, we should expect the real buying power of that allowance to shrink by around 8% as prices rise. This change could particularly affect those in the public sector, particularly high earners, who have built up substantial defined benefit pension schemes on which they are relying for their primary income. Changes such as this do not grab the headlines like a rise in the price of a pint but for a financial planner, they require careful thought. It is our job to make sure that you always pay the tax you are obliged to properly pay on your savings, investments, and pensions. Not a penny less, but not a penny more.
The chancellor also announced that the amount of investment gain that can be taken each year free of tax, the capital against tax annual exempt amount, will also be fixed at £12,300 for the next five years.
This exemption can be an excellent tool for drawing money out of investments in a tax-efficient manner. However, just like the Lifetime Allowance the real buying power of this cash will fall over the coming five years. It is in effect a stealth tax on those with savings. One thing that has not been frozen during the pandemic has been the cost of houses with prices across the UK rising by a full 8.1% over the year to the end of October.
For many the value in their house is the primary inheritance they are hoping to pass down to their loved ones. However, in a bid to tackle the burgeoning national debt the chancellor has frozen the amount of value that can be passed on free of tax, known as the inheritance rate nil rate band, at £325,000 until 2026. This is likely to bring many thousands of new people into this category over the coming years. The former Labour chancellor Roy Jenkins once famously said that inheritance tax is ‘a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue.’ His point of course is that proper financial planning can mitigate much of the cost of inheritance tax.
Financial advisers are able to deploy key tools such as Business Relief to invest money in areas that the government has determined can be excluded from the inheritance tax calculation under certain circumstances. Perhaps the most important thing to note in all these changes is that they keep happening. Even as the chancellor announced the budget, he also announced a range of reviews of inheritance tax, pensions and the tools the government would provide to enable investors to invest in green National Savings & Investment products.
It is the job of good financial plannesr to keep abreast of these changes and ensure that the arrangements that individuals have in place do not fall foul of an ever-changing environment for taxation, pensions and investment. Good financial planning should give people the confidence they wish to have in retirement and enable them to make the most of what they leave for loved ones. It is a job that has only become more vital as our national debt has risen and as our government hunts for taxation options.
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