The World In A Week - First mover advantage

Written by Millan Chauhan.

The latest figures released by the Commerce Department Bureau of Economic Analysis in the U.S. revealed that the personal consumption expenditure (PCE) price index figure increased by 2.4% in the 12 months to January 2024, in line with expectations. The core PCE price index (which excludes food and energy) rose 2.8% in the 12 months to January 2024. If you remember in mid-February, it was announced that US inflation figures for  the 12 months to January came in at 3.1% which was above expectations of 2.9%. The U.S. market responded positively to the latest PCE price index figures and the fact they were in line with expectations, as the S&P 500 returned +1.4% last week in GBP terms. The Federal Reserve are set to meet on the 19th-20th March where it will decide the trajectory of U.S. interest rates. We are set to receive one further U.S. inflation print on March 12th, ahead of this much anticipated meeting.

Elsewhere, in Europe, the inflation rate declined to 2.6% in the 12 months to February 2024, slowing from 2.8% in the previous month, however this was still above expectations as inflation is proving to be stickier than initially expected. Energy prices declined 3.7% over the month but food, alcohol and tobacco inflation remain high at 4% and services inflation still remains at 3.9%. Core inflation in Europe was announced at 3.1% with expectations at 2.9% and is a critical measure used by the European Central Bank who are set to meet this Thursday where expectations are that interest rates will be held at 4.5%.

In the UK, house prices increased for the first time since January 2023 according to Nationwide’s House Price Index which rose 1.2% in the 12 months to February 2024 as borrowing costs declined.

There has been much speculation as to what the UK Budget has in store for us with talks of cuts to personal taxes and national insurance. The Chancellor of the Exchequer, Jeremy Hunt is set to unveil his list of measures on Wednesday.

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 4th March 2024.
© 2024 YOU Asset Management. All rights reserved.

HMRC in clampdown on ‘side hustle’ tax dodgers

Brits selling second-hand goods or letting out their property online are being targeted by the taxman as part of a clampdown on those not declaring second incomes.

Under the new measures, online marketplaces such as eBay, Amazon, Etsy, Depop and Vinted will be required to report how much money their users are making and report it to the UK’s tax authority.

The new measures are an attempt to weed out those who are making taxable income on a so-called ‘side hustle’ that they have not declared.

An HMRC spokesperson said: “These new rules will support our work to help online sellers get their tax right first time. They will also help us detect any deliberate non-compliance, ensuring a level playing field for all taxpayers.”

Who is affected?

The crackdown is aimed at those who make a second income of more than £1,000 a year online, such as selling secondhand clothes on sites such as Depop and Vinted, letting out their property on Airbnb or delivering takeaway food for the likes of Deliveroo.

Once sellers pass the £1,000 threshold, they may have to register for self-assessment and pay tax on their earnings.

Does that mean I will have to pay tax on things I sell online?

Not necessarily. It all hinges around whether you are deemed to be a ‘trader’ or not, according to the Low Incomes Tax Reforms Group (LITRG).

For example, if you’re selling unwanted personal items such as old children’s clothes or toys online as a one-off, then you are unlikely to be deemed to be ‘trading’, LITRG says. These types of transactions are ‘generally not taxable’, even if you make a significant amount of money, it adds.

However, you may be liable for tax if this is deemed a regular activity and you’ve crossed the £1,000 threshold.

When does it come into effect?

The new rules came into effect on 1 January, although online marketplaces will not start reporting user data to HMRC until January 2025.

Why has this been introduced?

The market for second-hand goods, particularly fashion items, is booming. Websites such as Depop and Vinted have reported surging sales at a time when many fashion retailers have struggled.

A recent report by US marketplace ThredUP suggested the global market for second-hand apparel alone could more than double to $350bn (£276.3bn) by 2027.

Given that many of those who sell on these marketplaces are individuals and not businesses, it has led to concerns that many are not paying tax when they should.

Is this a new law?

Yes and no. There are technically no new tax obligations on individuals: if you made £1,000 or more selling goods online before now and were deemed to be ‘trading’, you likely already had to pay tax on it.

The major change announced this month is the requirement for online marketplaces such as eBay and Amazon to report their users’ data to HMRC routinely.

Do I need to do anything?

Victoria Todd, Head of LITRG, says: “The new rules have caused a great deal of confusion, but they simply mean that HMRC are receiving more information from online platforms than they were before. If you are following existing rules and declaring your income as required, then you don’t need to worry or do anything differently.”

However, if you are unclear whether you should be paying tax on income from goods you sell online, then it’s worth contacting HMRC as soon as possible.

Tax year end: Strategies to safeguard your finances

As the end of the current tax year draws near, we are about to enter the third year of the six-year freeze on income tax thresholds, a move that has significantly altered the fiscal landscape. The proportion of adults paying higher rates of income tax has risen from 3.5% in 1991-92 to an expected 14% by the 2027–28 fiscal year, according to the Institute for Fiscal Studies.

For those recently finding themselves in the higher tax bracket, as well as for those who have been navigating this territory for some time, here are four key strategies to help manage your finances more effectively and reduce tax liabilities:

1. Maximise pension contributions: Contributing to your pension not only prepares you for a secure future, but also offers immediate tax benefits. For higher-rate taxpayers, there is £40 in government tax relief available for every £100 contributed. It’s important to remember that while pension withdrawals are taxable, up to 25% can be taken as a tax-free lump sum, offering a strategic advantage in tax planning and potentially placing you in a lower tax bracket upon retirement.

2. Utilise pension contributions to preserve Child Benefit: For earners exceeding £50,000, the High Income Child Benefit Charge applies, progressively reducing Child Benefit. By making pension contributions, you can lower your taxable income, potentially mitigating or completely avoiding this charge, thus preserving your Child Benefit.

3. Invest in tax-efficient savings: With forthcoming reductions in capital gains and dividend allowances, ISAs and pensions become even more attractive as tax shelters. These vehicles allow you to fully utilise your annual allowances and protect your gains from tax liabilities.

4. Leverage spousal allowances: Married couples enjoy the benefit of double the allowances for ISAs, capital gains, personal savings, and dividends. Transferring assets between spouses can maximise the use of these combined allowances, offering potential tax savings and enhancing your financial strategy.

Beyond these strategies, keeping abreast of changes in tax regulations is crucial. The tax environment is constantly evolving, highlighting the need for dynamic financial planning and expert consultation.

Seeking tailored advice?

We are committed to empowering you with the knowledge and resources necessary for informed financial decision-making. Whether it’s tax planning, pension contributions, or investment strategies, our team is here to provide personalised guidance suited to your unique financial situation.

Contact us

Whether you’re an existing client or new to our services, we’re equipped to support your tax year-end planning and set you up for the year ahead. Why not arrange a meeting with one of our advisers, providing an opportunity to see how our bespoke advice can meet your financial needs. Book your session today to begin shaping your financial future.

Important: When investing your capital is at risk. The value of pensions and investments may fall as well as rise. Tax treatment varies according to individual circumstances and is subject to change. Tax advice is not regulated by the FCA.

The World In A Week - No roses – just recessions and rising inflation

Written by Ashwin Gurung.

Last week, the official data showed that at the end of last year both the UK and Japan economies fell into a technical recession. This was an outcome neither of the nations anticipated, marked by two straight quarters of negative economic growth. The US economy was also taken aback by hotter-than-expected inflation numbers.

The UK economy contracted once again in Q4 2023 by -0.3%, more than the market consensus of -0.1%, following a contraction of -0.1% in Q3 2023. The officials reported that in Q4, all major parts of the economy declined, with manufacturing, construction, and services having the greatest negative effect on growth. This is the first time the UK entered a recession since COVID-19 plummeted the economy in 2020. Meanwhile, the inflation rate remained unchanged, with the Core Consumer Price Index (CPI) holding steady at +5.1%, but below expectations, which renewed the hope that the Bank of England (BoE) will cut rates sooner. However, BoE Governor, Andrew Bailey, played down the GDP data before its release and said that the BoE is seeing signs of an “upturn” in the economy and the fall in the GDP looked “very shallow”. The Retail sales numbers released on Friday appear to have validated his statements, which rebounded +3.4% month-over-month, after a sharp fall of -3.3% in December.

Similarly, in Japan, the economy unexpectedly contracted -0.1% in Q4 of 2023, coming in below consensus of +0.3% growth, causing the economy to fall into recession for the first time in five years, as domestic demand declined. Consequently, Japan lost its position as the third-largest economy to Germany. While the weakening Yen coupled with a positive corporate earnings release supported the Japanese equity market last week, the Bank of Japan (BoJ) now faces challenges in supporting the economic growth as well as the currency.

Meanwhile, in the US, the unexpected rise in inflation dampened investor sentiment and briefly drove the US market lower. Core inflation, which excludes volatile items like food and energy, rose +0.4% for the month, contributing to a year-on-year increase of +3.9%, well above the Federal Reserve’s (the Fed) target of 2.0%. A significant factor driving this inflation was the rise in housing and rent prices over the past year, increasing by +6.0%. These items account for nearly one-third of the overall CPI basket. However, it is important to note that these factors are considered very lagging data points and does not represent the current conditions. Nonetheless, US stocks rebounded over the week.

This week, the investors will be looking forward to the Fed’s latest minutes on any new insights on the direction of the monetary policy. Additionally, an eagerly awaited earnings report from Nvidia is set to be released on Wednesday, which could have a potential impact on the market sentiment, given that much of the recent rally in the US equities has been fuelled by optimism surrounding Artificial Intelligence (AI).

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 19th February 2024.
© 2024 YOU Asset Management. All rights reserved.

The best approach for working with vulnerable clients

Working with clients who may be vulnerable, or show signs of vulnerability, is not uncommon – especially when offering services to those of an advanced age or with complex personal circumstances.

There are important signs to look out for with vulnerability and ways to best approach the issue to ensure best outcomes for clients.

There are important financial regulatory considerations to be made around vulnerable clients, too. City watchdog the Financial Conduct Authority has a specific definition of what constitutes a vulnerable customer:

 “A vulnerable customer is someone who, due to their personal circumstances, is especially susceptible to harm – particularly when a firm is not acting with appropriate levels of care.” 

The FCA refers to vulnerability among clients as creating a “spectrum of risk” which professional services providers need to be keenly aware of and able to deal with.

Complexity of vulnerability

Vulnerability is a complex problem. When a client should be classed as ‘vulnerable’ isn’t easy to define. The FCA says around 25 million people in the UK exhibit at least one or more signs of vulnerability.

The regulator’s 2022 Financial Lives research defines vulnerability as including low financial resilience, poor health, negative life events and low capability as all pertaining to increased vulnerability.

Health issues are also a clear indicator, but diagnoses such as cancer or dementia have varying effects on an individual’s wellbeing. The prognosis of these illnesses can also lead to some important financial decisions that need to be made.

Such illnesses often initiate a process such as a lasting power of attorney (LPA), a will update, or other legal work change that will have important financial considerations and implications.

Losing a partner is another trigger for vulnerability and the need for clients to seek out professional legal services, particularly if they’re dealing with the estate or other implications from the loss of a loved one.

In these circumstances it is essential to use the expertise of a financial adviser to better discern choices and planning for the vulnerable client in question.

This is important both for the regulatory implications of how you treat that client, but also to ensure the overall health, wellbeing, goals and outcomes for the client are met in the best way possible.

How to look after a vulnerable client

This is a very tricky issue as looking after the needs of a vulnerable client can require patience, empathy and diligence on the part of the service provider.

Within your business, it’s critical you ensure team members who deal with clients and the general public more widely are trained and well-versed in spotting the signs of vulnerability. The FCA has clear guidance on this.

The first step is to ensure your team understands the issue of vulnerability, its scope and how it affects people in their day-to-day lives.

Second, staff should be skilled and trained to offer practical and emotional support to customers who could be vulnerable. Especially important is giving frontline staff the tools and training they need to manage such a client.

Third, practical steps to ensure the wellbeing of the client is protected is key. Products, customer service and communication all need to be empathetic and easy for clients to understand.

When a vulnerable client, their relative, guardian or other trusted third party approaches your business to take care of a specific matter, understanding what their wider needs may be and if broader financial advice should be considered is really important.

Instead of providing singular services this will help them to meet their broader needs and ensure the best outcomes possible in the circumstances.

Law firm reprimanded for misleading financial promotions – how to get yours right

A Dorset-based law firm has been castigated by the Advertising Standard Agency for misleading adverts with the communications banned by the regulator.

The firm, TMS Legal, promoted two adverts which claimed clients had successfully claimed thousands in compensation relating to car financing.

However, the regulator found the advert testimonials were provided by paid actors and were not genuine case studies of successful legal claims.

The firm specialises in mis-selling claims related to packaged bank accounts, according to the report in The Law Society Gazette. The firm removed the offending adverts and apologised, citing internal oversight for the failure.

The company had already been fined £45,000 by the Solicitors Regulation Authority (SRA) for client due diligence failures and making inaccurate claims.

How to get financial promotions right

While mis-selling cases might not be your day-to-day bread and butter, it is essential to get any kind of financial promotions right.

Financial services is (rightly) extremely carefully regulated. The rules around promotions are highly specific and compliance is a central function within financial firms in order to ensure they are not falling foul of the rules.

The scrutiny of financial promotions has also heightened considerably for social media in recent years, particularly in relation to so-called ‘finfluencers’ or financial influencers – a growing area of financial promotions in advertising.

Working with finfluencers can be an effective strategy for a firm looking to promote its services, but again it needs to be fully compliant and carefully managed to ensure potential customers are not misled.

Social media guidance is in the process of being revamped by the financial regulator too, underlining the fact that the framework for promotions is ever-changing, making keeping up with the latest developments even more essential.

The adverts in question were placed on TikTok by the firm – a growing social media platform that is coming under increasing scrutiny from regulators as the quality and content of advertising explodes.

Compliance puzzle

 Promotions should be transparent and ensure truthful representations of case studies and results no matter the platform. While financial promotions are often useful ways to generate new business leads, they should not be taken lightly in their creation.

Legal firms looking to promote their services in the financial space would be best served by working with a professional financial partner in order to ensure full compliance and a successful campaign is possible.

Compliance is a tricky thing to get right, even for firms well-versed in the law. However, financial firms such as advice businesses are adept at following the carefully laid regulatory frameworks in place to protect both businesses and consumers.

Partnering with a financial advice firm to promote your financial-related services is a great way to ensure that promotions are fully compliant from the get-go.

Advice businesses take compliance as second nature and are extremely well-positioned to ensure campaigns are thoroughly vetted and maximise the potential to attract new business in the most compliant manner possible.

Partnering with an advice firm will open up a range of potential service possibilities too and increase the likelihood that a client will adopt more services for their legal and financial needs.

The World In A Week - Have we reached the summit?

Written by Shane Balkham.

UK inflation fell to below 5% in October, on the back of a sharp decline in energy costs.  The monthly publication from the Office of National Statistics (ONS) showed a 2.1% drop in UK Consumer Price Inflation (CPI) from 6.7% for September to 4.6% for October.

A significant contributor to this fall was the fall in energy prices; over the year to the end of October, gas prices fell by 31% and electricity prices fell by 15.6%.  Food prices were little changed for October.

This is a positive step bringing inflation back down to the Bank of England’s (BoE) target level of 2%.  There are another three weeks until the Monetary Policy Committee of the BoE meets to discuss the path of UK interest rates, and it remains a delicate balancing act.

The US also had a pleasant surprise for inflation, with a fall greater than expected.  US CPI for October fell from 3.7% to 3.2%, which was marginally below consensus expectations.  The reaction of the US market was one of relief, with US Treasury yields falling and the stock market rallying.

Some commentators believed that this was an overreaction by investors and while inflation is certainly heading in the right direction, there will be challenges ahead.  The US Federal Reserve meets a day earlier than the BoE, with the next decision on interest rate policy coming on 13th December.

It makes sense that the reaction from markets on October’s inflation readings was one of relief.  However, central banks are known for not necessarily doing the right thing at the right time, and although there is optimism that we have reached the peak in the interest rate hiking cycle, we are still treading carefully in our investment decisions.

From policymakers to politics, where the US House of Representatives voted to avert a costly government shutdown last week.  In a similar move to that of six weeks ago, the can has been kicked down the road until early in the new year.  The proposal provides a two-step plan that sets up two new shutdown deadlines next year.  US government funding has been divided into two different parts, with priority given to military construction, transportation, housing, and the Energy Department, which has a new deadline of 19th January 2024.  Anything not covered in this first step would be funded until 2nd February 2024.  Politics will certainly start the New Year in the spotlight and will likely remain there.

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 November 2023.
© 2023 YOU Asset Management. All rights reserved.

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.

The World In A Week - Summer Prints

Written by Millan Chauhan.

Last week, we saw the release of US inflation data where the US Consumer Price Index reached 3.2% on a year-over-year basis as of July 2023 which was below expectations of 3.3%. Inflation has fallen significantly from its highs of 9.1% in June 2022. Food was one of the largest contributors to July’s monthly inflation print of 0.2%. Food at Home costs rose 3.6% and Food Away from Home costs rose 7.1% on a year-over-year basis. Attention now turns towards the UK and Continental Europe where we await July’s inflation data readings on Wednesday and Friday respectively. In the UK, analysts expect to see inflation fall to 6.8% and in the Euro Area to 5.3%, both on a year-over-year basis for July 2023.

Over the last 15 months, we have seen central banks implement several interest rate hikes, which has caused commercial banks to raise the interest rate received on deposits by savers. Some banks have been slower to increase the interest rate received than others. Last week, the Italian Government stepped in to penalise banks for failing to pass enough of the interest hikes from the European Central Bank (ECB) to depositors, it initially stated that it would tax 40% of net interest margins in 2022 or 2023 which initially saw numerous Italian banks sell off sharply. The announcement was a shock to investors and was widely criticised. Subsequently the Italian Prime Minister, Giorgia Meloni backtracked the decision and clarified that any levy applied would be capped to 0.1% of assets.

The UK’s Gross Domestic Product (GDP) grew 0.5% in June 2023 which was above expectations of 0.2%. The extra bank holiday has been cited as a key driver; however, we have also seen production output grow 1.8% in June 2023 which outpaced the Services & Construction sectors. June’s strong economic growth data saw the UK’s Q2 GDP grow by 0.2%.

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 August 2023.
© 2023 YOU Asset Management. All rights reserved.

Why does the Bank of England hike rates to tame inflation?

Households have faced fierce price rises in the past 18 months, with the current rate of inflation (for April 2023) at 8.7% on the CPI measure by the Office for National Statistics (ONS).

However, with inflation so high, why does the Bank of England (BoE) respond with repeated rate hikes? Since inflation began to run away the BoE has been in a process of increasing interest rates. The Bank’s Monetary Policy Committee (MPC) meets most months to decide where it would like rates to be.

Since December 2021 the MPC has hiked the base rate 12 times, the largest hike by 0.75% in November 2022. The current base rate is now 4.5%, having risen from just 0.1% in December 2021.

Inflation game

In order to understand why interest rates are rising, first we have to understand inflation, its causes, and effects.

The government and national statistical authorities measure inflation in order to understand what is happening in the economy. A general goal of the Government is to help grow the economy as measured by gross domestic product (GDP). Although a fairly blunt measure, GDP is the best approximation economists have to tell whether, as a nation, we’re getting wealthier.

When an economy grows prices generally rise with it as people earn more money and spend more on goods and services. Inflation is not a ‘bad’ thing if controlled as it encourages spending, saving (when the interest rates are attractive) and investing. Inflation encourages saving and investing because doing this with your wealth is a good way to maintain or grow its value ahead of inflation.

However, problems can arise when inflation gets too high. This can be caused by an economy growing too quickly – people find themselves with more money and spend it quickly which leads to prices rising faster in response to the increasing demand.

It can also be caused by supply issues. If a company has less of something available to sell, but the same level of demand, it will typically hike the cost as a result – this is the kind of inflation we are largely suffering from now in the wake of the pandemic.

Where interest rates come in

This is where interest rates come into the picture. The UK economy during the 2010s generally lived with very low, stable levels of inflation. In the wake of the financial crisis the BoE cut interest rates to rock bottom in order to make borrowing cheap and encourage the financial system to function correctly. As inflation was so low, it saw little need to hike rates back up to historic levels. However, the inflation which started to rise in 2021 changed this thinking.

Hiking interest rates does two things to an economy.

Firstly, it makes debt more expensive. All debt-related products such as mortgages, loans and credit cards set a level of interest that is ultimately based upon calculations by financial providers who look to the BoE for guidance on a basic level of interest to set. When the BoE hikes its rates, so do these providers, such as banks and other financial institutions. For households, this means more expensive monthly payments on mortgages – if they have a tracker mortgage, more expensive debt servicing on credit cards, and more expensive loans. By doing this, the BoE effectively takes away households’ disposable income, forcing them to spend less on goods and services in the economy, and reining in demand and therefore ultimately, inflation.

The second effect of interest rate hikes is sort of the opposite – it makes saving more attractive. By increasing the base rate, the BoE encourages banks and savings providers to offer better savings rates to customers. By doing this, anyone with money saved up is encouraged not to spend it by better returns offered for leaving the money untouched. While easy-access savings accounts offer a good rate when this happens, the best rates are found in four- or five-year fixed savings accounts or ISAs.

However, this is only theoretical and there is a big issue at the moment which makes this situation look less attractive. With inflation at 8.7%, and the Bank of England base rate at 4.5% – savers, even on the best deals, still won’t find a rate of interest that beats inflation. This means ultimately that even if your money is locked away and earning interest, it is still losing value relative to inflation. As such, it still pays to look at different ways of using your hard-earned money, particularly by investing through the stock market, bonds, and other assets such as gold, property, and others.

In order to make the best decision it is important to consult with a financial adviser to ensure the best outcome and structure possible for your wealth.

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 June 2023.