Student loan changes increase pressure on The Bank of Mum and Dad
From 2023 future graduates will start to repay student loans sooner, putting more pressure on young people at a time when cost pressures are rising exponentially.
The threshold for repaying student loans will drop from £27,275 to £25,000 and graduates will continue to pay them back for much longer – up to 40 years.
With student loan changes in the UK set to exclude many young people from receiving financial support, The Bank of Mum and Dad will feel heightened pressure to support their children.
Here are some ways you can help your children financially in higher education and beyond.
- Look further than Student Finance
There are plenty of opportunities out there at the grasp of ambitious children. If you believe your child has the potential to apply for extra funding – such as a scholarship – why not encourage them to do it?
Postgraduate Search has a comprehensive list of bursaries and scholarships: don’t assume these are only for low incomes, top grades, or new starters – there are incentives for everything from subject choice and sporting talent to gender and nationality.
You can also search for hardship funds and advice for emergencies or managing debt at the university, too. University welfare teams, lecturers or simply a student adviser can be the best place to start.
- Be careful how you give
Most UK students don’t have to pay tuition costs until after graduation. After that, 9% will be taken monthly from their salaries.
Most won’t ever pay back their entire loans, and some will never pay anything at all if they don’t reach the income threshold. Student debt doesn’t function like normal debt such as a credit card or mortgage. You only pay if you can.
As a parent, you might be wondering how you can help your children financially, but using a lump sum to pay down student debt is not an effective solution. It would be more sensible to put that towards a child’s deposit on a house.
Alternatively, if you have extra monthly income you think can help, giving them money to deposit in a Lifetime ISA (LISA) can be an effective way to help them financially in the long term.
- Help them become organised
Good financial habits come naturally to some, but for your graduate child, they might not be the best with their money despite several years at university learning how to get by.
Helping them develop good financial habits and teaching them about important financial tools such as credit cards, savings accounts and insurance can be a really good way to help them without necessarily just giving them money.
Good financial habits will help them enter their new careers on a really strong footing and prevent disasters in the future.
- Use your Junior ISA (JISA) allowance
If you still have a few good years to wait for your children to go to university, try looking into opening a Junior ISA account.
That way, when they turn 18, your children can use a bigger pot of money to go to university, accomplish their dreams or even use it as a deposit for a house.
This account can also be a useful tool to help to educate your children about finance, as it offers the option to continue saving and investing the money after they turn 18.
Junior ISA subscriptions see their limit maintained at £9,000 per year. The JISA limit was last changed in early 2020, when it was doubled from £4,500 to its current level. So, there are plenty of resources.
Government under pressure to act over cost-of-living crisis: here’s what it might do
British households are facing an unprecedented cost-of-living crisis in 2022.
A harsh combination of factors have come together to make the business over everyday life more expensive for every household.
The Government, as a result, has come under considerable pressure to act to soften the blow of rising prices, energy bills and other areas of life which have become more costly.
But what has it done so far to alleviate the issue? And what could it still do to act?
The Chancellor Rishi Sunak has a Spring Statement coming on 23 March, which traditionally is fairly light on new policies, and generally contains updates on the UK’s economic performance, and the translating tax revenues for the Treasury.
But in recent days the Chancellor has been called upon to implement a full emergency Budget to tackle the cost-of-living crisis.
While he hasn’t at the time of writing gone so far, he has taken some measures to ease the pain for households.
What has the Government done so far?
- Energy bill help
On 3 February energy regulator Ofgem announced an unprecedented hike in the energy bill cap. The regulator rose the ceiling of what energy firms could charge customers on a Standard Variable Rate (SVR) by 54% – to £1,971 per year.
As a result, on the same day the Chancellor announced a package of measures to soften this hike for households.
The first of these measures is an energy bill rebate. This comes in the form of a £200 discount on energy bills, which households will get in October this year. This will then have to be paid back by paying an extra £40 a year on bills for the next five years.
The second measure the Chancellor Rishi Sunak has introduced is a £150 Council Tax Rebate for any households living in Band A or Band D properties. This will come through for those households in April, and will not need to be paid back.
The Government is also increasing the number of households which qualify for the Warm Homes Discount, which means some three million families will soon be eligible.
- Rate hikes
The second major step taken by the Government (albeit an independent arm of the State) is from the Bank of England, which is beginning the process of hiking interest rates.
The Bank Rate has been set at 0.1% since the onset of the coronavirus pandemic. Prior to this it was at 0.75%.
But the Bank of England surprised most analysts by hiking the rate to 0.25% in December, then again on 3 February – the first time it has done a back-to-back rate hike since 2004.
Although the absolute level of the Bank Rate is still low, it is a signal of intent from monetary policymakers to attempt to quell inflation.
By raising rates, the Bank of England makes it more expensive for households and businesses to borrow money, and more attractive to save. By doing this it hopes demand for goods and services will reduce, thereby slowing price rises.
In practical terms for households, this means debts such as mortgages and credit cards – unless fixed on a guaranteed rate – will get more expensive.
Investment markets now predict that the Bank of England could keep hiking rates for the rest of the year, at least four more times, with a rate of around 1.25% by 2023.
What could the Government still do?
- Energy bill VAT cut
Since leaving the European Union, the Government has been at pains to show off what it has been doing with its newfound post-Brexit powers.
One of the major policy levers that it has taken back from Brussels is the ability to set its own VAT rates – which were set centrally by the European Commission.
As a result, with the energy crisis, many MPs have called upon the Government to slash the VAT rate on energy bills.
The Government argues that doing so wouldn’t target savings in the right way, instead it would be giving a tax break to wealthier households.
But with the volatile political climate at the moment, it is still a lever that Sunak could reach for were it to become pressing to act again to help households.
- National Insurance climb down
The real elephant in the room during all the discussion around the cost-of-living crisis is the fact that the Government has already pushed through plans to hike National Insurance – dubbed a tax on working by critics.
The 1.25% hike was passed through Parliament last year, before the reality of the crisis took hold. But now the policy is gaining increasing criticism, considering the pressure households are under.
Many MPs in the Conservative Party, despite having voted the policy through, are now vocally calling for it to be reversed. While Rishi Sunak has so far resisted, a change in the political climate could soon make it untenable.
With the tax hike, earners on £30,000 a year will face an extra £255 to pay to HMRC, while someone earning £50,000 will pay an extra £505.
Dividend tax is also rising from April 2022. The basic rate dividend tax will be 8.75% up from of 7.5%. Higher rate dividend taxpayers will pay 33.75% up from 32.5%, and additional rate dividend taxpayers will pay 39.35%, up from 38.1%.
What are the inheritance tax implications for unmarried couples?
Marriage, once a staple social institution, is largely in decline. For those who choose to cohabit long-term with their partners, this creates tax and inheritance implications.
The number of unmarried cohabiting couples has risen considerably in the 21st Century. Between 2002 and 2020 (the most recent numbers available) unmarried cohabitation rose by around 78%, according to the ONS.
While in social terms, deciding against marriage or civil partnership is a perfectly normal part of modern society, it can create complications for those couples when it comes to financial planning, inheritance and taxes.
The purpose of this article is to explore those issues, and not make a judgement about the social choices!
Before going any further, it is important to clarify a common misconception. For legal purposes, there is no such thing as a “common law partner.” It is a very commonly held misconception about cohabitation. This extends to the point where some companies will allow you to pick “common law partner” when filling out forms. But it simply does not exist as a legal concept.
That being said, here are some primary things to think about if you are in a long-term cohabiting couple, and are concerned about the implications for your joint finances in the event a partner passes away.
Banking
Perhaps not considered in the same vein as broader inheritance, there is a basic legal issue which arises for couples that cohabit but are unmarried or civil partnered.
Many couples choose to do their banking through joint accounts, but others may choose to keep things separate. This can create a significant issue if one were to die, as the other would have no right of access to their accounts, and therefore money.
Such a situation can create ancillary headaches with issues such as how household bills, mortgage or rent payments get made. This can be rectified with some admin work, but bigger issues can arise if one partner held cash that the other then needs to access so that they don’t fall behind on those bills.
Property
Property ownership can be clear cut, but only if it is arranged correctly when purchased. If one partner owns a property in their name alone, the surviving partner has no clear right of ownership or habitation if the owner dies.
While broadly it falls under inheritance rules and will be governed by a document such as a Will, there is an easy way to protect against the problem, by making changes to the paperwork to incorporate both partners into ownership – either as joint owners or owners in common.
Common ownership can be a more practical solution, were the couple to split up, as essentially, they both own an agreed share of the asset. Joint ownership can be more complicated, because it means both parties share ownership of 100% of the asset.
Inheritance Tax
While the financial perks of marriage are fairly limited these days, there is one major benefit to being legally attached to your partner.
Inheritance rules make clear that married, or civil partnered spouses, enjoy far more protection and allowance against IHT than unmarried couples.
Everyone has an IHT allowance of £325,000-worth of assets. This is called the Nil Rate Band (NRB). IHT is payable at 40% of any assets above this level.
The Residential Nil Rate Band (RNRB) adds an extra £175,000 on top of the NRB when exclusively accounting for the value of the person’s main home. However, the rules are that in order to use this allowance, the person who died must have left their home, or a share of it, to their direct descendants.
For a married couple there is a spousal exemption when one of the partners dies. All the assets held by one can be transferred tax free to the other. Then, when the final partner dies, the entire sum of both people’s NRB and RNRB are combined to give a final allowance. This is potentially worth £1 million when taken in total.
Alternatively, for an unmarried couple, were one to die, the other would be liable for IHT on any assets they inherit worth above the other partner’s combined IHT exemption. Worse, the IHT will be payable before the assets can be transferred, potentially leaving the surviving partner with a hefty tax bill – one which they may have to sell their home to pay.
Finally, when the surviving partner dies, IHT is due again for anything over their personal allowances. This means those assets will potentially be taxed twice if their value still exceeds the allowances.
How to mitigate the issue of unmarried IHT?
It would be easy to suggest getting married or civil partnered would be the clear and easy way to mitigate the issues mentioned above. Ultimately this is true as at a stroke it takes away the issue of allowances, and gives special right of ownership and access to banking and property.
But in legal and social terms it may not be quite so easy, and that is understandable.
Having a Lasting Power of Attorney (LPA) and a Last Will and Testament (Will) in place is a great starting point. This will provide clarity on a partner’s inheritance, and their ability to access important resources such as bank accounts in the event of the other’s death.
Even if an unmarried couple has lived together for 50 years, without key documents such as Wills, there is no certainty that they will be the beneficiary of an inheritance. If someone dies intestate, inheritance of their property typically reverts to the nearest blood relative (next of kin), generally a child.
But there are also ways to structure wealth that can mitigate some of the issues, without resorting to tying the knot. If you would like to discuss this issue further don’t hesitate to get in touch with your financial adviser.
£250 work from home tax relief set to end – but still time to claim
A longstanding tax relief for anyone who works from home is set to be axed.
The Government has spent around £500 million giving cash back to workers who have had to stay at home during the pandemic.
Some 4.9 million workers have claimed the allowance since the pandemic began, according to HMRC. The Government has now set its sights on axing the relief as a result of its high cost, with HMRC conducting a review.
However, plans have not yet been confirmed, so for anyone who has worked at home – even for just one day – during the pandemic in the last two years can claim up to £125 per year, or £250 in total.
What is the relief?
Anyone who has to work from home can claim some of their tax back. The relief was introduced in 2003 to help home workers with bills such as internet, electricity, and other expenses they may incur.
For anyone paying the basic rate of income tax the relief is £62.40 per year. For higher rate payers, this rises to £124.80.
How can I claim it?
In order to claim you’ll need identifying documents such as a passport, National Insurance number, or payslips from your work.
You’ll need to go to the Government website, and go through the online process to claim, stating the date when you began to work from home.
The relief will then be paid to you through your normal pay, with up to £250 discounted from your tax bill as a lump sum if you’re claiming for backdated work. Your tax code will change directly with your employer.
There are some stipulations, however. If you’re self-employed or pay tax by self-assessment you cannot claim the allowance, as you must apply for the relief on your return instead.
If you receive expenses from your employer for working from home, this makes you ineligible.
If you’ve always worked from home or if you weren’t obliged to by the pandemic, then you can’t claim either. You can only claim the relief if you didn’t choose to work from home but were told to by your employer.
This is why the cost to the Treasury has ballooned during the pandemic – as millions of workers have probably not been able to work from the office.
That being said, at the start of the pandemic the rules were relaxed so that you only have to show you’ve worked from home for one day to claim the entire year’s sum.
How long do I have left to claim?
While nothing has been made official, it is believed HMRC is actively reviewing the relief with a view to either making it less easy to claim, or shutting it down entirely.
The Chancellor will be making his Spring Statement on 23 March – this is probably the most likely time when the loophole would be announced as closing. Many policies announced at this point tend to come into effect at the end of the tax year on 5 April.
For now however, the scheme is still open and available. If you go online and go through the process, you can still get back a tidy sum for the past two years’ work.
How to spot an investment scam
Investment scams are nothing new, but scammers are becoming more sophisticated than ever.
With the internet and easy movement of money, there are far greater opportunities for a fraudster to part you with your wealth.
In the first half of 2021 alone, financial trade body UK Finance estimates that more than £107 million was lost to investment scams, a 95% rise on losses in the first half of 2020.
When it comes to investment scams, it pays to take a critical eye to almost anything you’re approached with.
And while it is impossible to always be fully alert to these tricks, knowing what they might try is a good way to protect yourself from losing money.
Cold calling
Cold calling is perhaps the go-to for investment scams and is a well-trodden way to swindle money. In the vast majority of cases, if you get a call out of the blue from someone who wants to talk about investments, just hang up.
Indeed, pensions cold calling is now illegal, and has been for some time. Generally if you get a call like this where someone wants to discuss how your pension is invested, it’s a scammer. They are either operating illegally within the UK, or from abroad where the authorities have limited power to stop them.
Even when someone purporting to be from your bank calls to discuss the matter, it is generally advisable to politely end the call and try contacting the institution directly using their customer service line. Chances are it was a scammer who knows who you use for your banking or other financial products.
Cold calling isn’t the only way that scammers will try to contact you. Emails, text messages, letters and social media are all avenues for attack. But cold calling can be one of the most harmful as the fraudsters are often expert verbal manipulators. Take a deep breath and tell them no.
‘Trustworthy’ sponsors
This is a growing issue, especially as a range of mainstream media personalities and outlets are often engaged in combatting scammers, and then are themselves used to target victims.
Perhaps the most famous is Martin Lewis of MoneySavingExpert, who routinely reminds his followers on social media that often his image, or even fake commentary, is used to promote investment scams.
In another recent instance, consumer group Which? found its logo and name being used by scammers to try and push investment scams via email.
The scam involved victims being forwarded to a fraudulent website advertising fixed-rate bonds, something Which? says it would never do. The firm warns that the biggest giveaway in this instance is strange email addresses associated with the email message.
‘Guaranteed’ returns or ‘risk free’
Scammers will use all manner of promises to try and lure you into a fraudulent investment. One of the biggest red flags to watch for is the promise of “guaranteed returns” or “risk-free” investments.
Neither is ever possible when it comes to investment, as all investments carry some form of risk, and the return you can make is generally impossible to fully guarantee.
Look at the level of returns on offer if you aren’t sure. Savings rates are very low at the moment so anything offering high returns for your money is likely a scam.
And anyone promoting a legitimate investment will know not to try and tell you you’ll definitely get a high rate of return – hence why ‘risk warnings’ are so common with many marketing materials of investment firms.
Unusual investments
Another common red flag to watch for is unusual investments. Perhaps the most well-known example of this was the storage pod investment pension scam.
In 2017 the Serious Fraud Office (SFO) launched an investigation into two SIPP firms Capita Oak Pension and Henley Retirement Benefit for selling ‘storage pods’ to investors.
The SFO estimated losses around £120 million for those scammed into the scheme since 2011 – which essentially involved storage containers being purchased with investor money, which were then rented out.
Investors later found the returns were not as advertised and they couldn’t withdraw their money either.
Similar variations of this scam exist to sell other outlandish investments, including hotel rooms in the Caribbean or palm oil plantations in Asia.
Report the scam
This list is not exhaustive but is designed to give you an idea of how scammers might try to part you from your cash.
If you feel like you’ve been contacted by a scammer it is really important to report it. Not only to protect yourself, but to protect others who they might try and target.
- Text messages should be forwarded to Action Fraud – using number 7726.
- If you think you’ve fallen victim to a scam, in England, Wales or Northern Ireland, report it to Action Fraud online or by calling 0300 123 2040. In Scotland, report to Police Scotland by calling 101.
- You can also report a phishing attempt using the Action Fraud site, or by forwarding an email you think is suspicious to report@phishing.gov.uk.
If you have any concerns or issues you’d like to discuss further relating to scams, don’t hesitate to get in touch with a financial adviser to discuss.
Financial goals 2022: how to prepare your money for the year ahead
2022 is here, so it’s time to sit down, put the kettle on, and think about the year ahead for your money.
While it might seem a bit hackneyed setting New Year’s resolutions and such, thinking about how you want your financial situation to develop will give you a good head start in achieving both short-term and long-term goals.
But what should that thought process look like?
It can be easy to get bogged down in the minutiae of financial decisions, but this should be primarily a big picture process.
Is this the year you buy a house or move up the ladder? Is it time for retirement? Or are you just looking to continue growing your wealth as much as possible?
There’s no doubt you’ll have an idea already, and life can also get in the way, but a solid direction of travel is key.
Once you’ve got that ‘big picture’ in mind, then you can set yourself targets, goals and outcomes you’d like.
Reaffirm your goals
When it comes to financial planning, wealth growth and management, it all ultimately comes down to what your goals are.
Without goals, you can have no direction in your planning. It is likely you have a goal, or at least an idea in mind to begin with.
Think about what it is going to take to achieve that goal. If it’s a long-term aspiration, one year ahead might just be a minor part of that bigger picture.
But ultimately even the small choices we make have profound effects. Whether it’s putting money down on a new car, or socking it away in an ISA instead, that will change your outlook and strategy.
Be it a new car, retirement or a house, or any other financial goal, being clear what it is, is massively important.
Having this in mind will help define important aspects of wealth building such as timeline, risk appetite, and structure of your wealth.
Review your costs
Once you’ve got a clear idea of what you want from your personal finances and wealth in the next year, it’s time to look at how you can eke more out of what you’ve already got in front of you.
It is true that every year prices go up – but in 2022 we’re under particularly significant price pressures from inflation, and now the added issue of rising interest rates too.
Reviewing your spending in light of these problems is a tried and tested method for inoculating your money against shocks.
Reviewing bills, bargaining new deals, cancelling unused subscriptions, finding ways to be more frugal with everyday and non-essential spending – these are just some of the things you can do.
Think of it as a Spring cleaning for your finances – you make decisions every day of the year that accumulate and end up changing the face of your budget over a year.
Taking time to review and reset that is essential.
Reallocate resources
Once you’ve thought carefully about your costs, where cuts can be made or money spent more efficiently, you’re ready to look at how to reallocate what you have left each month.
This also counts for what you’re already saving. Is it going into the right place?
Cash is a viable place to keep wealth, but only if you plan on using it on a short time horizon. Everything else should be invested in one way or another.
But investing is an ever-changing beast to tackle. You should have long time horizons in mind when investing, but making adjustments and reassessing investment cases regularly is important, even if you don’t make any changes.
And where it goes matters too. Pensions may be a good long-term vehicle but having an ISA, or even a LISA can be really effective for wealth growth too. Thinking about the best way to allocate to those different accounts can make a big long-term difference to your wealth growth.
Get a check up
Once you’ve got a clearer idea of your costs, and your resources that you’re ready to deploy through savings or investments, consider getting a financial health check with an adviser.
Independent financial advisers have the benefit of being able to take an overarching view of where your wealth is, and what needs to be done to maximise its potential.
Get in touch with your financial adviser and talk about the above discussed topics, and you’ll be well-set for the year ahead.
Interest rates are going up – how it can affect your finances
The Bank of England surprised everyone in December by raising interest rates.
It did so from the all-time low of 0.1% to 0.25% – still a relatively low level by historic standards. For example, look back to 1990 and the bank’s interest rate was 15%.
More recently though – pre-2008 financial crisis – rates hovered above 5% for nearly a decade. So we’re starting from a low base with rate rises now.
But this will still affect your finances. And the Bank of England could keep hiking this year, with rises up to 1% possible.
Why raise interest rates?
The Bank of England’s primary objective for its ‘monetary policy’ is to keep inflation at bay. Unlike the US, it has no particular mandate regarding employment.
It is tasked by the Government to keep inflation to as near to 2% as possible. At the time of writing, inflation is a wallet-busting 5.1% on the consumer price index (CPI) measure.
By hiking interest rates in response to this, the Bank of England is attempting to quell demand. The ‘real world’ effect of this is that borrowing becomes more expensive, leaving businesses and households with less money to spend – forcing people to tighten their belts and slow down consumption.
At least, that is the economic theory. In practice the economic picture is more complicated. But for the purposes of our personal finances, this is the most important element to have in mind.
Impact of inflation
When thinking about how interest rate rises might affect your money, it’s first essential to consider why those rates are going up.
As mentioned above, rates are hiked because inflation is intolerably high. Inflation is the measure of how fast consumer prices are increasing, based on a balance of supply and demand.
You can have two core feeders into rising prices – either demand goes up, or supply becomes constrained. We have inflation now because of a mixture of both.
Lockdowns in 2020 and 2021 saw household spending plummet, leading to people having bigger than usual savings pots. Plus, the financial assistance from the Government in the form of the furlough scheme and other aid helped keep a lot of workers’ incomes relatively stable. This means when the economy opened up people had more money to spend.
This in turn caused a surge in demand for products and services which complex supply chains around the world struggled to fulfil. In combination then, the two effects have forced inflation much higher, quickly.
The net result of this is a range of goods and services we buy every day have become more expensive, faster than anyone expected. Everything from grocery bills, to clothes, fuel for our cars and energy supply to our houses has shot up in cost.
With this the state of the economy then, hiking interest rates becomes inevitable. But how does that in turn impact your personal finances and wealth?
Essentially, unless your earnings are rising to match the rise in the cost of living, you will find it harder to pay for the things you need each month.
It is likely that inflation will fall back down as a result of the rate hikes, and goods and services will rise in price less quickly. But it takes time for the effects to be felt in this sense.
There is however a more immediate impact of interest rate hikes on our personal finances.
Debt
The first, and usually most immediate impact of a rate rise, is to make the cost of debt rise.
When the Bank of England hiked rates in December, banks almost instantaneously announced they were hiking mortgage rates on new products, and those products which had tracker rates.
The same is true for personal loans without a fixed rate (although these are uncommon), and credit cards too. It is unfortunately quite cynical, but like when petrol and diesel prices rise, the banks pass on rate rises almost immediately to their customers.
It can be tricky to avoid these rises. If you have a mortgage which tracks the base rate, now would be an excellent time to consider remortgaging to a fixed rate. If you’re looking to get a new mortgage, then there really isn’t much you can do other than making sure you try to get the best deal possible, or have the biggest deposit you can to minimise the debt you take on.
If you have unsecured debts such as credit cards, try to pay off as much as you can as soon as possible. This will save you significant future costs to servicing that debt. Typically, providers have to give you 30 days’ notice if they do hike their rate, and you have 60 days to pay off the balance before it kicks in.
Savings rates
When interest rates go up, savings rates should go up too. Indeed, before the bank rate was hiked, savings rates were beginning to rise.
But there is a big caveat in this. The part of the cash savings market that saw rises was only in the top end with niche smaller providers.
Big retail banks such as HSBC, Lloyds and NatWest have continued to keep their average rates on offer extremely low. The current rate of interest offered by NatWest, for example, is 0.01% in its Instant Saver account, an extraordinarily miserly offer.
That compares with the current top rate instant savings account (at the time of writing) which is offered by Harpenden Building Society and comes with a rate of 0.75%.
Essentially the message here is that savings rates will go up now the bank rate is going up too. But if you want your money to work harder, it has to be placed somewhere where it will get the best rate possible.
For comparison of rates, a useful resource is Savers Friend, which is operated by financial data firm Moneyfacts.
But in reality, unless it is short term cash or a rainy-day fund, it’s likely to be better placed in investments to grow over time.
Investments
Finally, although indirectly, rising interest rates affect investments.
This happens through a more surreptitious process though and isn’t as obvious as a bank hiking rates. But some investments will begin to underperform once interest rates rise.
This happens for a multitude of reasons, but largely comes down to the bulk of investors moving away from fast growth stocks, such as tech, and into companies that benefit from rising rates, including (ironically enough) banks, manufacturers which benefit from lower material prices, home builders, and others.
Ultimately predicting how interest rates will affect particular investments is a difficult process. If unsure, then speak to your financial adviser who can help you figure out the best solution to your investment needs.
Money in 2022: tax allowances and other changes you need to be aware of
With a new year brings changes to the tax system, and other areas affecting our personal finances.
With inflation soaring, interest rates rising and the cost of living reaching extraordinary levels, it pays to keep an eye on all the big changes that might affect your wallet in 2022, but that you can plan and prepare for.
Here are changes you need to know about.
Income tax threshold freeze
The Government is set to freeze the income tax rate bands at their current levels.
As a result of this, more than 1.3 million people could be pulled into a higher tax band according to a study from the Institute of Fiscal Studies (IFS).
At the moment just 8.5% of workers’ pay the higher rate, but this could increase to 11% by tax year 2024-25 according to the IFS.
The personal allowance is currently £12,570, with anything between this and £50,270 taxed at the basic rate of 20%. The higher rate of income tax on anything above this is charged at 40%, up to £150,000. Finally, the additional rate is charged at 45% over £150,000.
So what does freezing these bands mean?
With inflation soaring it is likely you’ll be looking to earn more income to be able to keep up with the cost of living. But any pay rise you get could tip you into a higher band.
Plus, with any hikes to the bands now cancelled, you’ll miss out on the extra tax free cash from the personal allowance.
Other allowances are also frozen – the pensions lifetime allowance will stay at £1,073,100, the ISA allowance will stay at £20,000 and the inheritance tax threshold and nil-rate band will stay at £325,000 and £175,000 respectively.
National Insurance hike
Not content with holding back allowance rises, the Government has also decided to hike National Insurance (NI).
The new so-called Health and Social Care levy will raise an extra 1.25% in NI payments from anyone earning a salary, employers on their NI contributions, and on self-employed NI payments.
This means someone on a wage of £20,000 a year will pay an extra £130 in tax per annum. Someone on £50,000 a year will pay £505 more.
There is more too – the hike also affects dividends, meaning anyone taking an income from dividend payments will also see their tax bill increase by 1.25%.
Above an income of £2,000 the rate will be 8.75% for income within the basic rate band, 33.75% on the higher rate and 39.35% on the additional rate.
Energy prices
Already a big issue for many household budgets, energy prices have skyrocketed in recent months.
This led to a big hike in the price cap for energy bills, and this is likely to increase again, by up to £700 according to some estimates.
The current price cap is currently £1,277. While most analysts expect a rise of around £400, some think it could go as high as £2,000 depending on the state of the market by February.
The soaring prices have led to a swathe of energy firms going bust. If you’ve been affected by this, hold tight and wait for Ofgem to tell you which firm is taking over your supply, before attempting to change provider.
Unfortunately though, higher prices mean there is little price competition at the moment. If you want to save on energy bills, the best thing you can do right now is reduce your consumption, or make your property more energy efficient.
Loyalty penalty
New rules came into force for motor and home insurance customers on 1 January which mean anyone renewing their policy will not have to pay more than would be offered to a new customer.
These rules are designed to prevent the so-called ‘loyalty penalty’ – where a customer stays with the same insurer for years and sees their premium increase every time it comes to renew.
While those with policies to renew won’t see their prices increase, what is now likely is new policy prices will rise, and insurers could then offer higher prices to existing customers.
ISAs and pensions
Fortunately, this is one area where the Government has decided not to tinker with – for the moment at least.
Normal ISAs remained with a £20,000 annual allowance, while tax relief on pensions is still available with basic rate and higher rate relief.
This makes the two products still a great place to work to build wealth, and a great area to focus on for the year ahead.
If you would like to discuss any of the themes mentioned in this article, don’t hesitate to get in touch with your financial adviser.
Life expectancy reversal: State Pension age could be rising too fast
The State Pension age could be rising too quickly as life expectancy rates grind to a halt.
Analysis from pensions consultancy LCP suggests that life expectancy has stopped increasing. The rise in State Pension age, first from 65 to 67 and later to 68, may not be needed as a result.
The increase in State Pension age, cost aside, was predicated on rising life expectancies in the UK. But LCP’s analysis suggests life expectancy is now in fact decreasing, making the rise in age for State Pension unnecessary.
The Government had decided to increase the State Pension age on the basis that no one should spend more than a third of their life earning a retirement income from the State. It decided the State Pension age should rise to 68 by 2039.
The Government based its review of the State Pension age on average UK life expectancy. For example, as part of its analysis the Government predicted a woman aged 66 in 2014 could expect to live to age 89. But estimates from LCP suggest that women can now only expect to live to 87.
As a result, the increase in the State Pension age from 66 to 67, which is currently scheduled between 2026 and 2028 could be pushed back by 23 years – to 2049-51. Those born between 1961 and 1984 would enjoy much earlier receipt of their State Pension.
But the sheer cost of reversing the age rise could be too much for the Government to bear. Before the secondary impacts of taxation, reversing the State Pension age increases could cost the Treasury some £195 billion, with more than 20 million people potentially affected by the changes.
Commenting, Steve Webb, partner at LCP said: “The Government’s plans for rapid increases in state pension age have been blown out of the water by this new analysis.
“Even before the pandemic hit, the improvements in life expectancy which we had seen over the last century had almost ground to a halt.
“But the schedule for state pension age increases has not caught up with this new world. This analysis shows that current plans to increase the state pension age to 67 by 2028 need to be revisited as a matter of urgency.
“Pension ages for men and women reached 66 only last year, and there is now no case for yet another increase so soon.”
If you’d like to know more about what a change to the State Pension age could mean for you, then get in touch with your financial adviser.
Women must save £185,000 more during their careers to match men’s retirement income
Women have to save up to £185,000 more than men during their careers to match what men will earn in retirement, according to research from Scottish Widows.
The £185,000 figure can be broken down into £100,000 extra to bridge the savings gap, £50,000 to cover women’s’ longer life expectancy and £35,000 to pay for the extra care needs that this entails.
Scottish Widows has published its annual Women and Retirement report since 2006, looking at the differences between the sexes when it comes to retirement outcomes. In its latest report it has found women in their 20s today will save around £250,000 on average by the time they retire, while men will typically save £350,000.
Life expectancy for men and women also differs. A man aged 25 today is expected to live to age 86 on average, while a woman can expect to live to 89. It would take a £400,000 pot for the woman to match retirement incomes thanks to this longer life expectancy.
What is causing the discrepancy?
Looking at why there is a gender gap when it comes to retirement outcomes is not down to one simple thing.
Women can expect to earn around 40% less than men during their working years according to recent research from the Institute for Fiscal Studies (IFS). While this gap has decreased by around 25% in the past 25 years, it is difficult to close as typically, women fall behind in income terms when they take time out of the workforce to have children. The majority of gains according to the IFS are down to improvement in education among women in the past quarter decade.
As a result of these lower income expectations, savings and retirement outcomes are also negatively affected, causing the aforementioned savings gap. This is compounded by the fact that women tend to live longer too.
What can be done about it?
It is a difficult issue to resolve, especially as the only way to really avoid the shortfall is to not take time out from work. And with societal changes that reflect the discrepancy unlikely to be forthcoming any time soon, women need to take matters into their own hands.
In the situation where female workers are taking maternity leave or even breaks from careers, they should consider trying to contribute to a pension while off work or get a partner to contribute on their behalf. Anyone not working can still put in up to £2,880 each year. If someone is on paid maternity leave, ensuring they continue to pay in to a workplace pension is essential too.
Other potential measures to consider include increasing workplace pension contributions, deferring State Pension payments as long as possible and getting started with saving at as early an age as feasible.
Other than that, the best solution for women’s wealth is to have it working as hard as possible. This means making sure wealth is kept in a savings vehicle which will enable it to grow over time and ensuring any investment portfolios are structured for the best long-term outcomes.