Labour cancels wealth tax plans – how it could affect your portfolio
The Labour Party has ruled out major tax changes were it to win the next general election.
The news will be well-received by those looking to preserve their wealth over the long term, but doesn’t necessarily rule out other methods of making money for the Treasury.
Labour Shadow Chancellor Rachel Reeves has ruled out any new wealth taxes were the party to win power in 2024, when the next general election is due.
Party leader Keir Starmer has also ruled out hikes to income tax if he should be the next Prime Minister.
However, government budgets are extremely tight. With little room for borrowing – as Liz Truss’s controversial mini-Budget in 2022 demonstrated – raising taxes or cutting spending are the only realistic alternatives.
Taxation still looks like the most probable route for any government trying to balance the books. Short of creating miraculous economic growth, this would seem to be the only way forward.
What tax changes could we be in for?
The current government has already done a lot of tax tweaking to bring more cash in, without hiking headline rates.
Chief among these is pinning tax bands and allowances. The effect of this is with inflation and wage rises, more people are tipped into higher income tax bands.
For inheritance tax (IHT), it means every year more estates become liable to pay death duties.
Other areas where rates have been tweaked are changes to dividend taxes and capital gains tax.
Since the government has already fiddled with these, they might not be attractive options. Nonetheless, there are other potential sources.
Changing the rules around pensions tax relief is a long-mooted idea – either by equalising the relief to one rate, likely 30%, or doing away with the higher rate relief altogether.
Another, more unusual idea, floated in the Financial Times by Sushil Wadwhani – a former Bank of England Monetary Policy Committee (MPC) member – was taxing inflation by imposing a 100% tax on pay rises above 3%.
While this idea is somewhat fantastical, it illustrates that there are plenty of “innovative” ideas out there to find new ways of taxing wealth.
What can you do?
The Labour Party has been praised for ruling out new wealth taxes in a sign that it is willing to accept that some people have been able to accrue significant portfolios through hard work and over a long period of time.
The constant chopping and changing of tax rules and structures is also destabilising and creates ever more issues for families who are just trying to do the right thing.
It should also be caveated that these comments are by no means a guarantee, particularly as political and economic imperatives change frequently. The Labour Party is set to publish its manifesto ahead of the next general election, which must take place by December 2024. It is likely that we will find out more about potential plans then.
The best way to ensure that tax liabilities are managed carefully and effectively is to work with an adviser to ensure wealth growth is given the best opportunity to succeed and structured appropriately for your circumstances at all times, whatever the climate.
EU charity tax relief gift warning for estates
Leaving money to an EU-based charity will soon lose its tax-free status thanks to changes made to inheritance tax rules in March.
It is not uncommon for people to bequeath part of their wealth to charitable causes after they die. Up until this year such gifts have incurred no inheritance tax liabilities and are often seen as a positive way to give out wealth to those who might most need it.
Nevertheless, in the Government’s Budget in March, part of the fresh rules included a tweak to the relief on charitable gifts, which means that the tax relief would only be available to UK-based charities.
The change to the rules immediately impacted foreign charities. However, there is a transition period in place for EU-based charities until April 2024.
After that point any charity that is not based in the UK, including EU charities, will no longer be able to claim charitable tax relief on donations. Any estate bequeathing to a non-UK charity will lose the inheritance tax relief previously available.
How does charitable tax relief work?
Currently you can bequeath an unlimited amount of money to charity in your will and incur no inheritance tax (IHT) liabilities.
If you gift 10% or more of your estate to charity it reduces your IHT rate from a 40% charge on wealth over the nil rate band to 36%. It is one of many measures that are effective in reducing the overall potential IHT bill when you die.
With more estates moving into IHT liability, particularly with the bands frozen for more than a decade, this is no inconsiderable way to mitigate some of the potential liability.
What does the tax relief change mean?
Mitigating IHT through charitable donations is still a viable way of reducing your eventual IHT liability. However, the caveat is now that this will only apply to UK-based charitable donations from April 2024.
It is an incredibly tough decision to make, but if a non-UK charity is currently named as a beneficiary of your estate in your will, then this could have significant implications for the eventual tax bill to be paid by your estate.
If the charity you have in mind has UK-based entities, then ensuring you specify it will go to that branch will still be an effective strategy. However, outside of the UK, the same no longer applies.
This could also have an effect on British expats based in the EU with charitable giving in mind, as they could be caught out gifting to charities where they live abroad too.
If you have a nominated charity in your will that isn’t UK-based and would like to discuss your options, or for any other questions around inheritance tax planning and how charitable giving relief works, don’t hesitate to get in touch.
Bank of Mum and Dad: how to help your kids without compromising your plans
Nearly half (47%) of all property purchases in the UK will take place with the help from the so-called Bank of Mum and Dad (BOMAD) this year, according to new research.
The help from BOMAD will amount to around £8 billion according to the research from financial services provider Legal & General, towards the purchase of around 318,400 properties – a record level.
This is set to rise even more to £10 billion by 2025, says the firm. More than half of parents or grandparents (58%) help their family purchase a property do so for first-time buyers.
Bernie Hickman, CEO, Legal & General Retail says: “Family wealth is increasingly becoming a prerequisite for homeownership, effectively locking some groups out of the housing market for years while they save for deposits, or even altogether.
“While family gifting has always played a prominent role in the UK housing market, our study shows that the value of those contributions has risen by more than a quarter on pre- pandemic levels.”
Generational wealth planning
It is in many ways a positive that a family has worked hard enough to be able to help their loved ones buy their own home.
Getting on the property ladder is increasingly difficult with rising mortgage rates and historically high prices compared to wage levels. However, this can have implications for the parents or grandparents’ own financial plans.
Hickman explains: “An increasing reliance on family members isn’t only an issue for those seeking to buy – it is important to acknowledge the financial strain it can place on the giver, particularly if they are undertaking this commitment without financial advice. By dipping into savings and pensions, family members may be compromising on their own retirement incomes.”
So, what can you do to ensure help for your family, while not compromising your own plans? Having a generational wealth plan in place is key.
As a starting point, if you want to help with a home purchase, then planning for that as early as possible is essential. That money should be earmarked and in the right kind of account in order to minimise tax liabilities, particularly around pensions.
There are ways to contribute early on to your children or grandchildren’s financial future, such as setting up a junior ISA (JISA). However, the potential pitfall with a JISA is once the child turns 18, they gain full control of that pot. Although they might be financially responsible, not all 18-year-olds are, or they may have other priorities such as paying for university.
So, if you want to earmark that cash specifically for a house deposit, it might be wise to retain control of it yourself until the time comes.
It is also really important to consider inheritance tax (IHT) gifting rules. You can give as much as you like to a child, but under the seven-year rule, you’ll have to live for seven years past the gifting date for your estate to fully expunge any potential IHT liability for the gift.
Finally, as Hickman suggests, giving away a significant lump sum can have an impact on your own future financial stability and access to funds. In order to ensure the gift doesn’t have a detrimental effect, it is a good idea to go through the process of cashflow modelling.
Cashflow modelling can help you to decide where the best place is to draw the gift from, be it an ISA, pension, or even through selling other assets such as your property (if you’re planning on downsizing). Each option will have its benefits and drawbacks and should be discussed carefully with an adviser.
Top ways to ensure your pension is on the right path
For anyone with a retirement pot to look after it is important to be aware of what your pension is doing.
Pensions are an unfortunately complex retirement savings product, with a myriad of reliefs and tax rules around them which govern how much you can pay in, and what you can eventually take out. For that reason, it pays to ensure you’re keeping a close enough eye on your retirement funds to maximise the benefits of the pension and prevent any issues arising later in life.
Here are some key things to think about when it comes to your pension.
Are you contributing enough?
This is important for anyone saving into a pension, but the earlier you consider how much you’re saving into a pension the better. This is because the longer you leave more money to grow in a pension, the better the eventual outcome – i.e., how big your retirement fund – will be.
Final salary or ‘defined benefit’ (DB) pensions are on the way out. These were schemes in the past where workers paid in a nominal amount, but most of the liabilities for paying an income in retirement fell on either their employer, or in many cases for public sector workers, the government.
These days a defined contribution (DC) pension is much more likely to be what you’re saving into. What makes this different from DB is you only really get out what you put in to DC pensions. Employers are obliged to contribute a minimum of 3% to your workplace pension, with minimum personal contributions set at 5%. However, if you earn over £50,270 the contributions are capped to £183.46 per month. This isn’t a hard cap – you can increase your contributions – but you will have to actively ask your employer to increase them.
In terms of what is ‘enough’ this depends on what kind of lifestyle you would expect to maintain in later life and can be quite tricky to figure out. A common rule of thumb is that you would need to be able to give yourself an income worth around two thirds of what you earn today. This typically only factors in that you might have paid off your mortgage though, accounting for one third of your outgoings.
If you are unsure what sort of level you should be saving to, it is essential to speak to an adviser who can help you ascertain important aspects of planning for that retirement income.
Are you taking the right risk?
Contributions are one thing, but if a pot isn’t growing sufficiently over the long term, then this will greatly diminish the effectiveness of pension savings over a lifetime.
Another rule of thumb here is the younger you are, the more risk you should be taking. When you start a new workplace pension your money will be put in what is called the ‘default’ fund. These kinds of funds are routinely criticised for underperforming comparative funds elsewhere, and can leave retirees with disappointment come retirement.
Conversely, as you approach your chosen retirement age, it is a good idea to start considering derisking some of your portfolio. This is to preserve the value of the pot in long-term investment markets, and also to start adjusting some of your assets to focus on paying an income – which you will need in retirement.
How can I find missing pots?
With people regularly changing jobs over the years, it can be easier than you might assume to lose track of pension funds, particularly for older pots that don’t have digital accounts and might have been drawn up with simple paperwork.
This is also compounded by the financial services industry which is routinely changing company names or going through sales and mergers. The company who had your pot 10 year ago might be different today!
Fortunately, there are good ways to go about tracking down a missing pot. The government has a pension tracing service which should be your first port of call to track down an old pension. If this doesn’t bear fruit, then speaking to your old employer, then a financial adviser, could be good next steps as they will have more access to information about where the pension might have ended up.
Is it worth consolidating pots?
If you’ve found an old pot, or you’ve got small pots from old employers which you’re not contributing to, it could be worth considering consolidation of those pots. The main reasons why consolidation is beneficial is it makes it easier to manage the money in one place, and you could find somewhere better value, or with more options for your money to save.
There are a few drawbacks to pot consolidation that you should be aware of though. The first being that some pension pots, particularly older DB pots, come with specific arrangements, rules and bonuses that could be lost if you were to transfer the money out of that pot. If this could be the case for you, it is essential you speak to an adviser before taking any action.
Secondly, small pots do have some tax benefits, which can help toward certain goals when you retire. Once you reach pensions freedom age, pensions worth under £10,000 can be taken all in one go, with 25% tax free. You can do this with an unlimited number of workplace pensions, or with up to three personal pensions.
When can you access your retirement fund?
This comes down to the pension freedoms age mentioned above. This is currently set at 55 but will increase to 57 in 2028 to coincide with the rising state pension age.
It is ever more likely these days that you might be working well beyond the age of 57. If that is the case then it could be beneficial to draw upon other sources of wealth in your 50s and leave the pension untouched as long as possible, so you can continue to enjoy generous tax relief benefits from your salary.
An adviser can help you decide the best strategy for this and everything else mentioned previously in this article. Using tools such as cashflow modelling and by structuring growing wealth carefully, you will be able to maximise the benefit of a pension and minimise some of the potential pitfalls.
£150k cryptocurrency fraud warning: key ways to protect your money from scams
Gloucestershire Police have issued a cryptocurrency scam warning after a victim was defrauded out of £150,000.
Staff at a bank in Cheltenham contacted police after a customer tried to transfer money to an account flagged as fraudulent. The customer, in their 60s, thought they were investing in a cryptocurrency scheme, but it was little more than a scam. The victim had been communicating with the scammers via WhatsApp.
Cryptocurrencies are generally unregulated financial assets that fall outside of the normal boundaries of financial markets. The best-known cryptocurrencies are infamous for their volatility and extraordinary price swings, while countless incidences of scams take place in so called “rug pulls” where someone touts the investment case of a particular token and encourages large numbers of investors to deposit money. Once the scammer has accrued enough money, they “pull the rug” and disappear with the funds, leaving investors with worthless digital tokens.
Spot the signs
Scammers are often highly sophisticated and use a web of digital tools to ensnare their victims. Fortunately, there are basic rules to have in your mind to protect yourself from fraud.
- Don’t give any heed to cold approaches. This could be via phone, email or any other communication platform such as social media. A random cold approach is a big red flag. Indeed, the Government is currently working to make all cold calling illegal.
- Beware too good to be true figures. A good signal that something could be a scam is a promise that is too good to be true. This includes guaranteeing a financial return on an investment, promising outlandishly high returns or any other hype around the future (and unknowable) performance of an asset. This is particularly common with cryptocurrencies.
- Verify their identities. If someone calls you claiming to be from a provider you use, such as your bank, pension provider or other firm, then thank them for contacting you but tell them you will get back in touch independently. Hang up the phone and find the contact number for the company and verify whether it really was them calling.
- Don’t get rushed. This is a classic tactic from scammers, they want to rush you into handing over information as quickly as possible because they don’t want you to stop and think whether this “product” they’re offering is actually real or if it is just a scam.
- Don’t trust websites you find on Google. Website cloning and URL spoofing is a rising problem. Although Google is the first port of call for finding a company’s website for many of us, scammers routinely buy advertising to appear at the top of results with cloned websites. Make sure the site you are clicking on doesn’t have odd spelling. Scammers will go as far as putting Cyrillic lettering in names to confuse search engines.
- Check the FCA register. As a rule, you should only ever engage with financial firms listed on the FCA register. This is perhaps the best way to ensure the legitimacy of a firm, and to find out contact information or website addresses. Although it’s not foolproof – firms get struck off the register for a variety of reasons – it is the best way to ensure the company you deal with is legitimate.
- Speak to an adviser. When making financial decisions around investing, it is really important to not just rely on your own gut feeling about an idea. Speaking to an adviser and getting the right help when making decisions can prevent disaster and will help you to make the best decisions possible in the circumstances.
Government weighs abolishing income tax benefit for inherited pensions
The Government could be set to scrap a valuable income tax benefit relating to the inheritance of pensions.
The tax perk allows someone under the age of 75 to bequeath an uncrystallised (i.e., still invested) defined contribution (DC) pension pot without any income tax liability when the beneficiary draws income from the pot. However, the proposal from HMRC recommends that from April, untouched pensions should no longer be exempt from income tax when inherited. This means anyone who inherits the pot would be liable to pay their marginal rate of income tax on whatever they draw down. The announcement follows a consultation around the tax treatment of inherited pensions and relates to wider reforms around the lifetime allowance (LTA).
How does this affect your wealth?
Pensions are one of the most efficient ways to plan for inheritance, thanks largely to the generous income tax benefit which could now be axed. The Government scrapped the pension LTA of £1,073,100 in April this year, making maximising pension tax benefits a much more attractive option for efficient tax and wealth planning. The removal of the LTA abolished 55% taxation on lump sums withdrawn over the LTA, plus a 25% charge on regular withdrawals. However, the Labour Party has committed to reversing the change should it win the next General Election, which is currently pencilled in for December 2024, putting pension planning in doubt.
With house price growth over the past decade, many families that would never have expected to face an IHT bill are now being dragged into the frame for it. The latest figures from HMRC suggest an extra 50,000 families will be dragged into paying inheritance tax (IHT) by 2028. This is largely thanks to the ongoing frozen IHT threshold of £325,000 which has been in place over a decade, with an extra £175,000 allowance for main residence. Combined with a partner, the total tax-free allowance can be as much as £1 million.
Plans to abolish the pension inheritance income tax benefit have been recommended for April 2024, but are not set in stone as of yet and there has been no legislation forthcoming from the government. While it is important to be aware of the potential change, by no means should it totally change a wealth plan just yet. The benefit also only impacts the pension pot of someone who dies under the age of 75. It is important to consider factors such as life expectancy, health and lifestyle as this benefit might not ultimately be that relevant.
Overall, it is key to be aware of the potential benefits and pitfalls in wealth and retirement planning, and to prepare your portfolio for the best outcome possible, no matter the inclinations of the government of the day.
If you would like to discuss the pensions inheritance issue further or anything else relating to your wealth planning, don’t hesitate to get in touch.
What are the Mansion House pension reforms and will they affect your wealth?
Chancellor Jeremy Hunt announced pension reforms - dubbed the “Mansion House Reforms” - in early July.
According to the Treasury, the reforms are set to unlock an additional £75 billion in investment for high-growth British businesses by utilising the cash in the nation’s pension pots. How will this affect your pension on an individual level? This depends on how proactive you are with the management of your savings pots.
Mansion House Reforms in practice
The reforms announced by Hunt are looking to redirect money in UK pensions towards investments that might help to boost the economy. The UK has the largest pension market in Europe with around £2.5 trillion in assets. Through the reforms, the nine largest pension providers in the UK have agreed to increase investment in unlisted equities – i.e., companies not represented in the stock market – from around 1% of assets to 5%. The Government says this could potentially unlock around £50 billion in extra investment cash for fast-growing firms in the UK as a result.
Chancellor Hunt commented in the announcement: “British pensioners should benefit from British business success. By unlocking investment, we will boost retirement income by over £1,000 a year for typical earner over the course of their career.
“This also means more investment in our most promising companies, driving growth in the UK.” The reforms are backed by a wide range of businesses from JPMorgan to Octopus and the ScaleUp Institute.
How will my pension be affected?
The reforms are a potentially large shift in how investment capital in the UK, through pensions, is used. Major pension providers will look to tweak the allocations of their default investment funds to match the 5% unlisted equity threshold. However, it isn’t compulsory to have your pension pot invested in this way. The tricky thing here is your workplace pension might be one of the signatories to the scheme, and the choices beyond default fund might be limited. Members of the compact include: Aegon, Aviva, L&G, Mercer, M&G, Nest, Phoenix, Scottish Widows and Smart Pension. These default funds might not be the best place for your portfolio depending on your circumstances. It is really important to speak to an adviser to decide on the best course of action for any pension pot as this shift in investment and risk outlook can have significant implications.
Unlisted equities tend to be riskier than listed companies, which tend only to be on the stock market thanks to a proven track record. They are also less liquid which makes it harder for investment funds to sell assets if they require cash. If you are closer to retirement these kinds of investments might not be the right choice for you, especially if you are looking to protect your capital rather than going for growth.
Either way, get in touch to discuss your options.
What is sudden wealth? How to deal with an overnight windfall
Sudden wealth is a growing issue as older generations begin to pass on significant estates to their loved ones. The phrase “sudden wealth” is likely to conjure images of winning the lottery or inheriting a large sum from a mysterious great aunt.
However, more likely than not, it pertains to people whose parents have quietly squirreled away a nest egg through property, pensions and other assets over a lifetime. The crux is when these people pass away – they may have failed to put in place an inheritance plan, or even to properly explain to beneficiaries what the contents of a portfolio are and how much they’re worth. This can create huge issues for their beneficiaries as unmitigated tax liabilities can force people to sell assets they may not be prepared to deal with.
It can create other issues such as people becoming “accidental landlords” without really knowing what they’re taking on. There can also be issues where someone suddenly finds themselves with large sums in their bank accounts but has little idea of what the most responsible thing is to do with that money.
This is what makes intergenerational financial planning absolutely critical to protect those beneficiaries from a surprise inheritance.
Intergenerational financial planning
With older generations accruing larger amounts of wealth the potential for this wealth to pass on to their children - or even grandchildren - increases the risks associated with that wealth. It is therefore critical for a family to plan together for the outcomes of inheritance. A child is going to struggle if they inherit a substantial portfolio of assets from their parent with little clue of what those assets are, how they work and how to manage them. Dealing with an overnight windfall such as this can be emotionally extremely difficult and can lead to major mistakes that unravel years of sensible management.
While basic practices such as having a will in place are key, involving children in the decision-making process of how that estate planning is managed is really important, as is ensuring they understand what the assets are and how much they’re worth. How that wealth trickles down to younger generations will impact the tax that they pay, and how to structure that wealth over the long term. It can also colour decisions you make early in retirement in regard to which assets you draw upon to fund your retirement. For instance – gifting is an effective way to mitigate inheritance tax (IHT), but if your wealth is largely bound up in property this might not be the most effective way to pass on money – particularly if it leaves you cash poor.
Ensuring your loved ones fully understand your wealth portfolio will also prevent them from making mistakes once it passes to them. An adviser can help structure the process and talk to everyone involved in order to prepare them for what is to come. Intergenerational wealth planning takes care of the wider picture and how it can affect multiple generations, their future plans and their own wealth. It is an essential process for anyone with assets to pass on.
How to deal with sudden wealth
For those who have found themselves with a sudden windfall, be it through parents who didn’t communicate their plans, a lottery win, or a mysterious wealthy relative, the most important first step is to speak to a financial adviser.
An adviser will help you to understand the potential tax implications, the best way to structure what you have received in order to set it up successfully for life and mitigate any issues with your own wealth, and how to deal with the emotional implications of such a large windfall.
The temptation might be to go on a spending splurge. While buying that car you always wanted or taking the trip of a life time isn’t necessarily bad, it is essential to ensure that you can enjoy the fruits of some of that wealth while also making it work for you and last in the long term.
How to get the most out of your workplace pension
Pension provider Aviva has warned that workers are “sleepwalking” into retirement with one in three employees unaware of how many pensions they have.
Workplace pensions are very different in 2023 compared to past decades. Gone are the old final salary or ‘defined benefit’ (DB) pensions and in are defined contribution (DC) pots for our long-term savings. Making the most of your DC pension really matters – you really do get out what you put into it. There are a few really important aspects to consider with these workplace pensions, and ways to maximise the potential for growth.
Contributions
The first thing to note about DC pensions is there is a minimum contribution level which is set automatically by the Government. While there is always conjecture over what level it should be at, the basic requirements are:
- 5% from your gross income (including tax relief)
- 3% from your employer
Under auto enrolment you will be automatically given a workplace pension pot assuming you earn more than £10,000 a year. Opting out is essentially throwing away money. If you don’t have the workplace pot, then you’re essentially turning down income from your employers. The annual contribution limit to pensions is £60,000, which makes it more generous than an ISA in cash terms. It is a good idea then to contribute as much as you can to unlock valuable tax relief.
Pensions are arguably better than ISAs because of this tax relief. While you will have to figure out tax liabilities when withdrawing from a pension later in life, the extra upfront money from tax relief when compared to an ISA means you have more money to start with that can grow over time.
There is another thing to watch out for too – if you earn above £50,000 then automatic pension contributions are actually capped. For instance, if you earn £45,000 a year your total monthly contribution to a pension will be £161.50. If you earn £50,000 this will rise to £182.33. However, if your income rises to £55,000 the cap on contributions means your employer won’t contribute more, and your salary won’t adjust contributions higher, meaning you’ll be contributing less than 5%.
It is essential to check with your employer and consider asking them to increase your contributions above this level if you want to maximise your pension pot.
Consolidation
A very common issue, as Aviva alludes to in its research, is just how many pension pots we now accrue. Every time you switch jobs, you’ll start a new pot with whichever provider your employer uses. This can lead to a mess of small pots with a mixture of policies, charges and performance, and isn’t ideal. Some people choose to consolidate all those pots into one coherent SIPP. You can’t do this with your current workplace’s pot because this would mean forgoing those valuable employer contributions, but with old pots you might not be adding to, this can be a good way to manage the entire amount in one place.
There is a caveat to this, however.
The ‘small pot lump sum’ allows you to take a whole pot in one go when it is worth below £10,000, with 25% of it tax free. If the pot is in a workplace pension it’s unlimited how many times you can do this, but if it’s in a personal pension then you can only take three.
It is important to consider your options carefully here and is highly recommend to speak to an adviser who can help you plan the best course of action.
Investment
The final strand of workplace pensions is perhaps the most forgotten of all – investing. It’s easy to think of a pension as just a savings pot you accrue, but in fact that money is all invested in order to grow over time and maximise the size of the nest egg when you retire. The issue here is that workplace pension investment options can be a bit lacklustre.
The problem here is that investment options vary enormously by provider. Some offer hundreds of funds while others will offer maybe three to five. There’s nothing you can do about this as it is at the behest of your employer to pick the provider. However, if you think you might be in an underperforming “default” fund, it is essential to seek advice on ways in which to improve the growth potential of your pot.
The same goes for any personal pension you have, as picking the right kind of funds can set you up for long-term failure or success.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 18th July 2023.
The biggest mistakes to avoid when making out a will
Creating a will is a crucial part of a complete, long-term financial plan. Not having one can create major issues for your loved ones after you’re gone.
Of course, not having a will at all is the biggest mistake of the lot, but since you’re reading this article, we’ll assume you’ve made sure to get yours in order! Instead, we’re going to focus on major mistakes people can make when sorting theirs out.
Waiting too long to make one
You might be in the best shape of your life and not too worried about what happens to your estate when you’re gone. However, this is a big mistake. Like with anything in life we can never know what is around the corner. It’s uncommon but tragedies do happen, and when something happens to someone without a will, it just makes the situation worse for those left behind.
Waiting too long can also have implications when you’re older as unfortunately some people lose the capacity to make their own decisions. This can render a will redundant and can lead to familial disputes. Ensure yours is done when you’ve still got your wits about you.
Doing it DIY
Many people assume you can just write your wishes down on a piece of paper and sign it and, voila, you have a will. This is wrong. Wills should be arranged very carefully to meet legally binding criteria. This includes having non-related witnesses, naming executors, being unclear in explanations and other pitfalls that can lead to disputes.
It is essential to seek professional advice when formulating a will to avoid such issues arising.
Missing out assets
Another issue when creating a will is simply forgetting to add certain assets. Key things such as savings pots, your home and other significant assets will likely not go forgotten. However, what about that classic car in the garage, or the antique serving spoons you inherited from your grandmother? Everything needs to be accounted for, otherwise again this can lead to familial disputes.
In the modern age it is even worth having express wishes for what you would like to happen to things like social media accounts, computer files or other digital possessions. It might be more intangible, but it still matters.
Not updating
This is a huge mistake that can create major issues for your estate. Your will should be a living document, not just something you write once and stuff in a drawer (it should be somewhere under lock and key anyway!). If your financial situation or any other aspect of your wealth and possessions changes, then this needs to be accounted for in the will. In some cases, creating an amendment is sufficient, but if larger changes occur to your theoretical estate, then this can require a new draft entirely. It is important to consult with a professional either way to make sure.
Forgetting stepchildren
This is a quirky but very relevant problem in 2023. With modern blended families evermore common, if you’ve got stepchildren you need to specify them in the will, assuming you wish to leave them something. This is a curious problem in that you might just refer to all your kids as “my children” but in the complexities of legal interpretation, this can open up doubt about whether that just means your biological children.
It is better to expressly state “my children and stepchildren” where necessary to avoid all doubt.
Using the wrong witnesses
Witnessing the signing of the will is an essential part of what makes it valid. There are a few ways this can go wrong. The two witnesses must be over age 18. They must not be beneficiaries or married to someone who might be a beneficiary. They must not be related to you in anyway, either biologically or through your partner.
While some of these might seem like obvious errors, they happen all the time and lead to much worse outcomes for your estate. For even the most straightforward of wills it is important to consult with a professional who can guide you through the process to set you up for the best outcome possible.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 18th July 2023.
Should you pay your child’s student loans?
As the university year ends and a fresh crop of students graduate, should you look to help your child with their loans, or even the costs if they are yet to attend?
As a parent with young adult children, you’ll be acutely aware of how much it costs to go to university these days. Day-to-day living costs aside, the maximum fees for university now stand at £9,250 per year in England. This cost is compounded by interest rates, which have risen massively since the Bank of England began its rate hikes in December 2021. Those on Student Loan Plans 1 or 4 pay 5.5%, while Plan 2 and postgraduate loans pay an eye-watering 7.1% currently.
As a parent, if you have the means to help a child with the cost of tuition fees, you might wonder if it is a good idea to pitch in. However, there are some important aspects to consider before doing so, that will affect both your child and your wealth planning.
How student loans work
To get to grips with whether you should soften the blow of student loans for a child or grandchild, it is essential to understand how the system works. Student loans and student debt does not function like normal debt. It does not affect a student’s credit rating, other than for overall income considerations when applying for a mortgage. Payment for the loan is taken at source, meaning there’s no need to manage the loan like you would with a normal debt. In effect, student loans actually function as a form of income tax levy. Once someone earns above a certain threshold, the Government deducts a portion of their wages to pay back the loan.
Here are the various income thresholds depending on the plan the student is on:
| Plan type | Yearly threshold | Monthly threshold | Weekly threshold |
| Plan 1 | £22,015 | £1,834 | £423 |
| Plan 2 | £27,295 | £2,274 | £524 |
| Plan 4 | £27,660 | £2,305 | £532 |
| Plan 5 | £25,000 | £2,083 | £480 |
| Postgraduate Loan | £21,000 | £1,750 | £403 |
Source: Gov.uk student loans repayment
As for how much you pay, this is calculated as 9% of your income over the threshold for plans 1, 2, 4 and 5. For postgraduate loans it’s 6%. This interest rate, in effect, is the additional income tax levy that the student with the loans takes, once they earn enough money. The debt is cancelled after either 25 years from the first April they were due to pay, or by age 65, depending on the plan. What is really critical here is that, because of the payment threshold and time limit on repaying, it doesn’t really matter how much debt the student has. They could have £30,000 or £3 million – they will only ever pay 6-9% of their income above the threshold of earnings. This is all entirely contingent then on what kind of career and income the student ends up having. Someone earning a lower level of income will pay less overall, whereas someone who goes on to earn a much higher income will pay much more of their loan back, or even all of it.
Other ways to help
The big question to ask yourself then is whether you want to help your child or grandchild avoid having to pay what is in effect an income tax levy on their earnings. Of course, if you do help this will aid their month-to-month earnings potential, but this is by no means a given depending on their career choices. There are other really valuable ways to help your child instead that could help them to achieve other goals such as owning a home. Contributing toward a house deposit could lower their mortgage costs and improve the options available to them in terms of property.
Other ways to help include gifting, which if done carefully following IHT rules, can be an effective way to help your child with ongoing living costs in small bitesize chunks. Putting money into a pension for your child can be a great long-term solution too, as this is often one of the most difficult things for a young person starting out in their career to appreciate the importance of.
Finally, if your kids are still younger and you’re just thinking about the future then contributing to a junior ISA can be a great way to set them up for success in young adulthood.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 18th July 2023.
Should you trust finfluencers?
Financial influencers or ‘finfluencers’ are a major social media trend at the moment.
With millions of followers across platforms such as Instagram, TikTok, YouTube and elsewhere, these people purport to offer anything from small-time money tips to investing advice and financial ‘hacks.’ However the UK’s financial regulator, the Financial Conduct Authority (FCA), alongside the Advertising Standards Agency (ASA), has warned against finfluencers pushing financial products they have no authority on.
Far from helping you or your children with money, these finfluencers often recommend highly risky financial strategies and ideas that range from unregulated cryptocurrencies to straight up scams. Sarah Pritchard, executive director, Markets at the FCA comments: “We’ve seen more cases of influencers touting products that they shouldn’t be. “They are often doing this without knowledge of the rules and without understanding of the harm they could cause their followers. “We want to work with influencers so they keep on the right side of the law, as this will also help protect people from being shown scams or investments that are too risky.”
Can you trust finfluencers?
Finfluencers have become something of a global phenomenon in recent years, with millions of followers and a global reach. However, it is precisely this global reach that creates the first issues for anyone listening to what they have to say.
Top finfluencers such as Humphrey Yang, Tori Dunlap or Taylor Price have combined followings of nearly 100 million people. The first issue with these three is all are US-based. So, any information they pass on is likely not useful for anyone in the UK anyway. Also looking at their CVs, while Humphrey Yang says he’s an “ex financial adviser”, neither Dunlap nor Price appear to have any particular financial qualifications.
This phenomenon doesn’t stop with dedicated finfluencers however. Regular ‘influencers’ who routinely talk about areas such as beauty, food, travel and leisure are often paid by companies to promote products. Sometimes these can be innocuous things like face creams or clothing, but frequently people can be seen promoting financial products or investments that are wholly inappropriate. This is the nub of the campaign from the FCA which is warning against such activity.
The FCA partnered with well-known influencer Sharon Gaffka, famous for her stint on Love Island, in the campaign, who added: “When you leave a show like Love Island, you are bombarded with opportunities to promote products and work with brands, if like me, you’re new to this kind of work, it can be a little bit overwhelming. “This campaign with the FCA and ASA will hopefully make sure other influencers stay on the right side of the law and prevent them from unknowingly introducing their followers to scams or high-risk investments.”
Why financial advice matters
The allure of finfluencers is that they are easy to access and create content that is engaging – designed to capture your attention and make big claims based on spurious ideas. The reality of good financial management and long-term wealth growth is clear and concise planning and advice over many years, that takes into account different products, investment and strategies to achieve the strongest growth, income and tax efficient outcomes.
It’s essential that you speak to a financial adviser to ensure the best outcomes for your money. Conversely, if you have children who are achieving life goals such as home ownership and even saving for the future, it is important to bring them along on the journey too. This way they will have the best understanding of your plans, and how they factor in, and could benefit too.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 16th May 2023.
When is your Tax Freedom Day?
Tax Freedom Day is the day in the year where, theoretically, you’re no longer working solely to pay your annual taxes and instead begin keeping your own money. These numbers are of course calculated by averages. Individually speaking, everyone will have a slightly different Tax Freedom Day of their own.
In 2022 Tax Freedom Day fell on 8 June, whereas in 2021 Tax Freedom Day fell a full week earlier, such is the heightened burden of taxation. It reminds us that any money you earn effectively goes straight into the Government’s coffers. Last year it took an average worker 159 days to start earning money for themselves. The Tax Freedom Day of 2022 was the latest on record, according to the Adam Smith Institute, thanks to a persistently increasing tax burden on households, and it is only predicted to fall even later in 2023. However, it is possible to bring your Tax Freedom Day forward.
Planning for tax efficiency
This especially matters if you’re facing taxes on more than just income. Taxation comes in many forms and can be a serious barrier to successful wealth growth.
Through an individual’s lifetime, taxation will take a cut of:
- Property through stamp duty and council tax
- Income through income tax (and National Insurance)
- Expenditure through VAT
- Profits on investments through capital gains tax
- Profit on investment income through dividend tax
- Passing on your estate to loved ones through inheritance tax (IHT)
There’s good news and bad news in this. Some of these taxes are essentially unavoidable. Income tax, council tax, VAT and stamp duty are effectively unavoidable unless you become a tax exile. Obviously with income tax there are ways to reduce the burden, but typically this comes from reliefs such as Marriage Allowance, which won’t apply to everyone and will only reduce the liability by a relatively small amount.
However, there are significant and effective ways to mitigate the effects of taxes on investments, long-term savings and other liquid investments. This comes primarily through the use of pensions and ISA allowances.
Pensions allow for the deferral of tax liability until you access your pension. Of course, there are implications when you do draw down, but the relief at source available makes this worth it to a large extent. Plus, the 25% tax free allowance and other ways to structure drawdown make pensions still very valuable. Add to that the recent abolition of the lifetime allowance and pensions are a viable method for mitigation still. Plus, pensions are currently largely exempt from inheritance tax, adding another feather to the cap of the vehicle’s tax efficiency. They can also be a good way of getting around the gifting allowance, as individuals are able to pay in to pensions for children or grandchildren from any age.
ISAs provide a reverse benefit to pensions for long-term tax liability mitigation. While you won’t get upfront relief for contributions, there are essentially no implications when it comes to using the money at the other end.
Finally, one of the most disliked and complicated taxes, inheritance tax (IHT), has a myriad of rules and allowances that allow for mitigation. However, what is essential to remember with IHT is these mitigations are best applied over time. This makes careful wealth management and planning critical. Coupled with well-structured growth through ISAs, pensions and other methods you could see your own personal Tax Freedom Day start to fall much earlier in the year.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 16th May 2023.
Food prices rising at record levels – but does that mean higher inflation and interest rates for longer?
Households have felt persistent pressure on their everyday costs, but food price inflation has been particularly pernicious in recent months.
The Office for National Statistics (ONS) reported year-on-year food price increases of 19.1% in March 2023 based on the consumer price index (CPI) measure. This was an increase from 18% the month before. Consumer data provider BRC-NielsonIQ saw its shop price index show 17.8% price increases year-on-year in April – the highest increase seen in 45 years.
With the headline rate of 10.1% CPI inflation, should we be concerned about inflation persisting for longer, and thus bigger interest rate hikes?
Why food prices are soaring
Food prices are just one aspect of a wider basket of goods and services the ONS measures in order to gauge the general rise in the cost of living for households. Food price rises are particularly high because they suffer from the secondary effects of the kind of inflation the UK, and most of Europe, is suffering. The current high level of inflation is primarily stoked by an energy crisis, which in turn is caused by returning demand post-pandemic and then the invasion of Ukraine by Russia.
Energy prices are a painful place to see rapid rises because they essentially affect everything else. From factory lines to food processing and just about anything else you can think of, households and businesses all need energy to function. If the price of energy rises, it holds that the prices of things we make should rise to cover that cost. Food is especially volatile because it has even more external factors that can affect it, plus major food production supplies, such as from Ukraine, are under extreme and unusual pressure.
Food prices are so volatile most countries produce ‘core inflation’ statistics that exclude food prices. CPI core inflation is currently at 6.2%.
Interest rates
With food inflation so persistently high, this begs the question whether the Bank of England will meet the challenge with more aggressive rate hikes in order to bring prices down. However, precisely because the bank knows how volatile food prices can be, it will be cautious about acting upon those figures alone.
Energy prices are starting to come down in earnest, with wholesale gas prices now below the level they were at before the invasion of Ukraine in February 2022 and at the lowest level since December 2021. Plus, other global macroeconomic effects such as an unusually strong dollar are busy unwinding. A strong dollar tends to increase inflation pressure because many commodities are traded globally priced in dollars.
If the pound falls versus the dollar, then those commodities become more expensive for the country to acquire and vice versa. Since reaching a low of £1:$1.07 at the end of September last year, the pound has steadily gained ground and is now trading around $1.26.
All that said, the Bank of England will be cautious about ending rate hikes, or even starting cuts, until it is sure inflation is coming back to earth in a meaningful way.
Where does this leave me and my money?
Inflation is a critical metric to watch when it comes to long-term wealth management. The level of inflation has a direct impact on where central banks go with interest rates and this in turn has profound implications in everything from government debt and taxation levels to market performance and cash value erosion. Over time the figures might seem irrelevant but the only way to keep ahead of inflation and prepare for major financial and tax-based changes that will affect your portfolio and lifetime wealth is careful management.
If you would like to discuss inflation, interest rates and the general outlook for the rest of 2023 and the implications for your wealth, don’t hesitate to get in touch.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 16th May 2023.
Inheritance tax cut on the cards
The Prime Minister Rishi Sunak is said to be considering cutting Inheritance Tax (IHT) ahead of the next general election in 2024.
According to a report first published by financial news site Bloomberg, Sunak is considering a cut to IHT alongside other potential tax cuts in order to garner more public support ahead of a new election campaign. There is however little detail on the proposed cut and what it might contain.
What might an IHT cut contain?
The number of households liable to IHT has slowly crept up over a decade, mainly thanks to the threshold staying at £325,000 since 2009. This means that property values which have risen naturally over time have tipped homeowners over the threshold, resulting in more estates being subject to larger IHT bills. The basic 40% IHT rate has also remained the same for some time. As such, these two aspects of the tax could be the chief target of a change, either with a cut to the rate or lifting of the threshold.
IHT is one of the most disliked taxes in the country, aside from the fact it is payable when someone dies, chiefly because it is seen as taxing assets and income that have already been heavily taxed along the way in life. Cuts to the tax would be a popular move. Research from legal firm Kingsley Napier found that three in five Brits (63%) support increasing the allowance, while nearly half (48%) would be in favour of abolishing the tax, which brought in £6.1 billion to HMRC last year, altogether.
Complexity
IHT was the subject of a review by the Office of Tax Simplification (OTS) in 2018. However, the main findings of this were that the process of IHT was too onerous for families and the administration should be simplified. The Government however rejected the changes in 2021.
Other potential changes could include the rules around gifting, the residence nil rate band – currently £175,000, and other aspects of the tax. It is however unlikely that we’ll see IHT cuts imminently. There are two key opportunities for the Government to make such a move, this Autumn in its financial statement update, or in the 2024 Spring Budget. This is open to political speculation and is dependent on how the economy fares this year. Government borrowing has already come in less than expected in the past 12 months, which suggests Chancellor Hunt could have more room for manoeuvre come his next financial update.
Ultimately, much will depend on the polls and whether the Prime Minister thinks he could win next May (a typical time of year to hold the general election) or wait until the last opportunity of December 2024.
Either way, the key message for anyone thinking about planning their wealth for the long term is to have a strong plan in place for any outcome. As the goalposts move, having access to key advice for structuring your wealth is critical for positive lifelong outcomes.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 16th May 2023.
Faster State pension age rise paused: what it means for you
The Government has abandoned plans to bring forward the increase in the State Pension age, at least for the time being.
Claims surfaced in January that the Government was seeking to bring forward the State Pension age increase to 2035, leaving people aged 54 and under with an extra year to wait before receiving the valuable benefits. This was largely down to money-saving pressures from the Treasury as it looked to steady the Government’s long-term finances. However, now this would appear to no longer be necessary.
The Government has kicked a final decision on this into the long grass and it is not expected to happen until after the next General Election in 2024, as it is seen as a vote-losing decision if taken. Work and pensions secretary Mel Stride confirmed the pause to MPs, commenting: “Given the level of uncertainty about the data on life expectancy, labour markets, the public finances, and the significance of these decisions on the lives of millions of people, I am mindful a different decision might be appropriate once these factors are clearer.”
Current plans
Under current plans, the current State Pension age of 66 is set to rise to 67 between 2026 and 2028. It will then rise to 68 between 2044 and 2046. The latter change will affect anyone born after April 1977. A report published last year by Conservative peer Lady Neville-Rolfe aimed to ensure no one spent more than a third of their lives in retirement. The report recommended bringing forward the State Pension age increase to 68 by several years to 2041.
However, the Government is still reviewing actuarial data around life expectancy. A review by the Government into its retirement system funding found that life expectancy was not increasing as fast as expected, leaving the State Pension funding in a better position. Major events such as the pandemic and various crises in the health and care system appear to have clouded the picture on life expectancy for Brits somewhat. If indeed life expectancy isn’t increasing, or is even reversing, then the age changes may no longer be necessary at all.
The State Pension was created after the Second World War when life expectancy for average working adults was much lower than currently. This is why, in recent decades, the Government has been forced to undergo drastic changes to the rules and age boundaries, including equalising the retirement age for both men and women.
The State Pension has undergone a 10.1% uplift this year which means those in receipt of the new full State Pension will receive £10,600 a year. While this is a small amount of money, it still forms an essential, consistent part of retiree incomes, especially in later life.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 20th April 2023.
The ins and outs of insurance protection
Households have come through Winter and things could be looking up for energy bills. The threat of power cuts failed to materialise, but many households would have felt the pinch as monthly direct debits soared to cover rising prices.
Now as we look towards Summer, the energy market and the Government’s response to the crisis is taking on a new dimension.
Ofgem price cap
The main measure to manage price stability for household energy bills has been in place for several years already – a price cap set by the energy market regulator Ofgem. It currently stands at £3,280, having taken effect from 1 April. This is down from the previous cap of £4,279. It is important to note however that bills will vary and these figures are an average used by Ofgem, and the cap actually applies to the kilowatt hours (kWh) used by a home, plus standing charges.
While it is good news that the price cap has been lowered, in practice it is still much higher than previous cap levels – thanks to high energy costs caused by excess post-pandemic demand and the conflict in Ukraine.
Energy Price Guarantee
Although it’s important to be aware of the price cap level, it is currently moot thanks to the Government’s additional Energy Price Guarantee (EPG), which was created to protect households from soaring costs last Winter.
Initially, the Government set the EPG at £2,500 per household. This was calculated like the price cap, keeping the cost per kWh lower than the market price – effectively subsidising household bills. The EPG was set to rise to £3,000 in April, but at the Spring Budget Chancellor Jeremy Hunt confirmed it would be maintained at the same initial level until June this year. The Government has also been paying a £400 rebate to all households, which should have been arriving monthly in the bill payer’s bank account over six months in payments of around £67.
Energy price outlook
The Government’s EPG is set to end in June. However, it looks increasingly likely that Ofgem will set a new price cap at this point below the EPG level anyway – rendering it effectively unnecessary. This is chiefly thanks to easing of the energy price shock and the market normalising, as it adapts to the new environment after Russia’s invasion of Ukraine.
In terms of actual prices to expect, this is subject to change, but current estimates from Cornwall Insight, an energy market analysis firm, suggest a new price cap of £2,024 in July this year, and £2,074 from October. This is of course subject to change as the market develops, but hopefully the direction of travel will continue downward for now, particularly if the global economy shows signs of weakness in the months ahead.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 20th April 2023.
Energy market update: what’s happening to household bills
Households have come through Winter and things could be looking up for energy bills. The threat of power cuts failed to materialise, but many households would have felt the pinch as monthly direct debits soared to cover rising prices.
Now as we look towards Summer, the energy market and the Government’s response to the crisis is taking on a new dimension.
Ofgem price cap
The main measure to manage price stability for household energy bills has been in place for several years already – a price cap set by the energy market regulator Ofgem. It currently stands at £3,280, having taken effect from 1 April. This is down from the previous cap of £4,279. It is important to note however that bills will vary and these figures are an average used by Ofgem, and the cap actually applies to the kilowatt hours (kWh) used by a home, plus standing charges.
While it is good news that the price cap has been lowered, in practice it is still much higher than previous cap levels – thanks to high energy costs caused by excess post-pandemic demand and the conflict in Ukraine.
Energy Price Guarantee
Although it’s important to be aware of the price cap level, it is currently moot thanks to the Government’s additional Energy Price Guarantee (EPG), which was created to protect households from soaring costs last Winter.
Initially, the Government set the EPG at £2,500 per household. This was calculated like the price cap, keeping the cost per kWh lower than the market price – effectively subsidising household bills. The EPG was set to rise to £3,000 in April, but at the Spring Budget Chancellor Jeremy Hunt confirmed it would be maintained at the same initial level until June this year. The Government has also been paying a £400 rebate to all households, which should have been arriving monthly in the bill payer’s bank account over six months in payments of around £67.
Energy price outlook
The Government’s EPG is set to end in June. However, it looks increasingly likely that Ofgem will set a new price cap at this point below the EPG level anyway – rendering it effectively unnecessary. This is chiefly thanks to easing of the energy price shock and the market normalising, as it adapts to the new environment after Russia’s invasion of Ukraine.
In terms of actual prices to expect, this is subject to change, but current estimates from Cornwall Insight, an energy market analysis firm, suggest a new price cap of £2,024 in July this year, and £2,074 from October. This is of course subject to change as the market develops, but hopefully the direction of travel will continue downward for now, particularly if the global economy shows signs of weakness in the months ahead.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 20th April 2023.
Could you soon be working a four-day work week?
Four-day work weeks could soon be the norm after a major study found considerable benefits for workers and businesses.
The study, which involved 61 firms from a range of industries, encompassing around 3,000 workers has been hailed as a major success as the majority were convinced of its practical benefits. Not only did worker turnover decrease, employees reported a lower level of burnout while some firms also experienced unusual increases in revenues – suggesting it made those businesses more productive.
The success of the trial has seen politicians call for its wider implementation while major businesses, such as Sainsburys and Dunelm, are considering adopting the practice. It’s safe to say that the four-day work week trend could soon be coming to your workplace. However, what are the potential financial implications?
How a four-day work week would affect you and your money
The trial was explicitly designed so that workers would enjoy more free time while continuing to earn the same amount of money as if they were working five-day weeks. From an earnings standpoint - no one should lose out.
There is also a potential impact on the success of the business you work for, in the long term, if the findings of the trial bear out more widely. If businesses are able to improve productivity and earn more money, it could lead to better pay rewards for workers too.
Another aspect that could be of benefit is what people do in their extra free day. While some may choose to spend more time on leisure activities, with kids or grandkids, or just relaxing, others may choose to pursue part-time work or even a side hustle business to earn extra money with their new-found time.
There are other important financial perks to consider such as the cost of childcare. The UK has some of the most expensive childcare costs in Europe, so as a parent or grandparent being able to help out with kids an extra day a week could be a financial, as well as familial boon. Since the pandemic, there has also been an increasing shift of older workers abstaining from the workforce. The reasons for this have been debated, with some citing wealthy retirement pots for many who don’t need to work, while others lay the blame on a healthcare crisis for older people. The introduction of more flexible working patterns such as a four-day week could be helpful for older workers looking for a softer reintroduction to the workplace, or flexibility to meet their lifestyles.
Drawbacks of a four-day work week
While there appear to be considerable benefits to a short working week, there are also some drawbacks.
Implementation may vary but some employers could ask workers to fulfil the same number of hours as they would over five. For instance, instead of working 5x eight-hour days employees could do 4x ten-hour days. Not all businesses will find shorter work weeks practical either, particularly those that rely on shift work. This could lead to staffing shortages in key sectors such as healthcare or hospitality.
Ultimately though, in financial terms, no one should be worse off from working less days in the week. Plus, with the freedom of an extra day to yourself, it could be an ideal time to start something new or spend more time on yourself.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 14th March 2023.
The pros and cons of getting a smart meter
Smart meters have been a contentious program encouraged by the Government as it looks to make the way households record their energy usage more efficient.
According to the most recent data from the Government, there are now over 30 million smart meters installed in homes and businesses around the country. Over half (54%) of all energy reading meters are now smart. Conversely, energy firms have been accused of pushing too hard on customers to install such meters, and much scepticism remains about their usefulness.
What do smart meters do?
Smart meters replace traditional meters in homes and businesses and allow for two key processes to take place. Firstly, they communicate directly with your energy provider using a mobile network signal and provide them with real-time information on your energy usage. This has the benefit that you won’t ever have to take a reading and update it manually with your provider. It also means that the energy firm you use can bill you as accurately as possible based on your usage. The second benefit is that you will get a portable monitor for your home that will show you a breakdown of your energy consumption. This has the benefit of showing you in real time how much energy you are using. If you turn on high-usage appliances such as tumble dryers or dishwashers, it should show you how much those appliances are using.
The Government also says smart meters have a benefit at a national level as they help it to ascertain an accurate picture of how the country is using energy. The Government has long-term goals relating to climate change that include reducing overall consumption, so this information is useful to it in this process. It also has secondary benefits such as alerting engineers and providers when there is a power cut and how to localise the issue to resolve it quicker. This saves them time and money, which theoretically ultimately leads to lower energy bills for households.
Can they save you money?
Smart meters can only save you money in the sense that they show you exactly how much you are using, and whether certain appliances in your home are using too much. They can also show you how much your base usage is. In other words, without turning on expensive appliances such as tumble dryers, you can get an idea of how much electricity and gas your home is consuming over the course of a typical day. It may be that you’ve got electronics or lighting that are using large amounts of electricity without you knowing. Or perhaps you’ve got the heating on too high, and this is driving up your gas usage.
In essence, all a smart meter can do to help you save on energy bills is to present you with a more accurate live view through the monitor of your consumption. However, it’s up to you to work out how to reduce that consumption if you feel your bills are too high.
The drawbacks of a smart meter
Smart meters present your energy provider with accurate and up to date information on your energy usage. If your usage goes up, this can lead to the provider adjusting your direct debit upwards to anticipate higher usage. Smart meter technology has also been criticised as unreliable. While less of an issue now, it was the case that when switching providers sometimes smart meters would not be able to carry over to the new provider, effectively turning them back into ‘dumb’ meters where you have to take a manual reading. While this is less of an issue with so-called SMETS-2 meters, ensuring a new provider is receiving the right information - if and when you do switch - is really important.
Smart meters can also suffer from technological foibles such as loss of signal, software issues and other problems that prevent them from accurately providing information to your energy supplier. It is important to keep an eye on it and your bills to ensure they’re charging you fairly and correctly.
Energy firms have also been criticised in the past for forcing smart meters on customers, using heavy-handed and pressure tactics to encourage adoption. The installation of smart meters can also be an issue for renters who manage their own energy bills but have a landlord who might not be willing to have one installed.
The energy outlook
Energy prices for households have been at record levels this winter, leading to eye-watering bills despite the Government’s energy price guarantee – which it has spent lots on protecting consumers from the worst rises. The good news is that gas prices – on which overall energy prices are reliant on – have mostly come down from record levels. This doesn’t unfortunately lead to lower energy bills immediately. This is because energy firms buy their energy from wholesalers on a longer-time horizon over many months.
Currently the energy price guarantee (EPG) ensures the average household will only pay a maximum of £2,500 a year for their energy. This figure can however be higher or lower based on a household’s usage as the guarantee relates to a cap on units of energy rather than the overall bill. The EPG is set to expire after March 2023. Energy consultancy Cornwall Insight has good news, however. It says that energy bills should on average come back down to below the EPG this year. Based upon current gas price levels, it believes average household bills should be around £2,200 by July-September 2023. While this is still well above historic levels, it should help to soften any further blows to household bills.
This outcome is still uncertain as Europe continues to suffer from energy market disruption thanks to the conflict in Ukraine. Much still depends on how governments respond to these ongoing geopolitical issues and how this ultimately affects wholesale fossil fuel prices.