NS&I hikes rates again – are they a good deal?
National Savings & Investments (NS&I) has upped the rates on its savings products again in the wake of the Bank of England hiking the bank rate on consecutive occasions.
NS&I now offer a Direct Saver with a return of 1.8%, up from 1.2% and 1.75% on its Direct ISA. Income bonds now also offer 1.8% returns – the highest level since 2012. Earlier in October it also increased the prize fund rate from 1.4% to 2.2% in premium bonds.
This is not a guaranteed level, but the average rate it says savers can now get based on prize wins in its premium bonds. That means you could win the top £1 million prize – or nothing at all. In practice the 2.2% rate is the average of what most savers will see as a return on their cash each year.
So, with these rates now at a decade-long high, is it time to put our cash back in the national savings bank?
Better rates elsewhere
NS&I holds a special place in the public’s imagination. Premium Bonds in particular are popular because of the prize-draw element of the savings product.
But in reality, the firm’s rates are inferior to other savings providers by some margin.
For example, at the time of writing, the best easy access account rate comes from Marcus By Goldman Sachs, with a 2.5% rate of interest on its savings account and its cash ISA, and no notice necessary to withdraw your money.
If you save for one year, you can get 4.6% from RCI Bank. For a five-year fix this rises to 4.95% from the same firm. If you want to shelter cash in an ISA, you can get a one-year bond from Aldermore for 3.65% or a five-year cash ISA from Leeds Building Society paying 4.31%.
It goes without saying then that NS&I is definitely not the most competitive. But it is also true that it will pay you a better rate than most high street banks, where you might hold your current account.
The interest rate outlook
The issue with these rates is while they look much better than in recent years, they still sit way behind inflation, which currently stands at around 10%. If you plump for the top-rate one-year bond, you’re still seeing your savings devalue by around 5.5% in a year.
On 3 November, the Bank of England staged the largest single rate hike since September 1989, hiking 0.75% and taking the base rate to 3%. This will no doubt push savings rates up even further.
But if we look into the detail of what its Monetary Policy Committee (MPC) said about the trajectory of interest rates, it believes financial markets are now overpricing its interest rate path, thanks to softening economic data.
What does this mean in practice?
Despite the big fresh hike, many firms that price their products on interest rate expectations, such as savings and mortgage providers, may now be overestimating how high the ‘terminal’ bank rate will go.
This terminal rate is essentially the high-water mark for the actual bank rate. If the economy is now largely overestimating this high-water mark, interest rates, counterintuitively, could now fall -or at least moderate – somewhat.
In short, this means that interest rates on financial products could already be near their high point and will at least remain well-short of inflation until price rises come back to normal levels, something the MPC only sees happening in 2024.
In the short term, having some cash set aside can be a good tool for anyone building wealth. See our article here on that. But in practice, investing still offers the best route for anyone thinking about long-term wealth growth.
Although investment performance is not guaranteed, it has generally been a better tool for wealth growth over a long-time frame.
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 9th November 2022.
How to protect your wealth in tough economic times
We’re not yet at the end of 2022 and it’s clear it has been a tough year for investors.
A toxic cocktail of inflation, rate hikes, quantitative tightening and Government instability leading to tax hikes has combined to create one of the toughest climates in decades for anyone looking to build their wealth.
But while it has been a difficult climate for many to deal with, there are some key measures anyone can take to protect and improve their wealth in such times.
The key to this is effective and active financial management and getting the right advice at the right time. Here are some ideas.
Hold some cash
This is a very basic idea, but it needs to be reaffirmed. Have a cash buffer. If you’re younger, have a family with dependents to look after, bills and a mortgage to pay it is essential to have a rainy-day fund to protect you in the event of a job loss or other problem that could leave you without an income or needing to pay a big bill.
If you’re in work, a rule of thumb is to look at your overall monthly outgoings and consider saving in cash up to a level of three to six months cover. You might want more or less, but consider how quickly you think you’d be able to get a new job and have that regular income coming back in.
If you’re in work, it’s also essential to have income protection plans in place and life insurance were the worst to happen. The younger and healthier you are, the cheaper the policy will be for you.
If you’re retired or not reliant on a wage for your living costs, then a cash buffer is really important in volatile markets. This is because if you’re using your wealth to pay for your cost of living, having to sell out of an asset when valuations are down will bake in losses permanently. Having cash to draw on is important for this in the short term.
Of course, holding cash is always at risk of devaluation thanks to inflation. This is an acceptable risk though with short-term framing for the use of this cash. To mitigate it, spread the money into savings accounts that pay decent rates. Put some in an instant access account and others in longer-time releases to benefit from better rates.
Savings rates in cash accounts are still well behind inflation but are better than they were even just a few months ago.
Beyond that if you’ve already got that cash buffer in place, top it up to an equivalent level to match your rising costs each year – or by the level of inflation if that’s easier to figure out.
Pay off debts
Debt in the current environment can be particularly toxic, but it falls into a couple of different camps.
In the past decade the economy has been largely fuelled by cheap debt. We’re used to seeing lurid stories of companies like Deliveroo taking payment by credit instalments for a pizza.
In short, it has been really easy to take on new debt. This era is coming to an end with rising interest rates. Rising rates – by design – make debt more expensive to manage. But there’s a couple of different kinds of debt to worry about here.
The most painful and urgent to fix is credit card and other unsecured debts which see rates move freely. If you have these kinds of debts paying them off should be prioritised over saving because the cost is simply going to get harder to manage.
Rising rates don’t just affect credit card APRs – they also reduce the availability and quality of deals such as balance transfer cards. In short, it’s time to kick the debt habit.
Fixed debt such as mortgages and loans function slightly differently though. Loans will often have a fixed rate which makes it more manageable to pay while mortgages come with fixed terms too and should be manageable as long as you’ve got time left on your deal.
Regular contributions
Once your cash position and debt levels are in a good place – think about the state of the market. While performance is never guaranteed, as global economic growth has progressed in the last century, so have investments in the markets that represent it.
If your investment values are down, this is ok. Generally, as markets recover so do investments.
But making continued regular contributions or even increasing your contributions can be a good strategy in this environment as it takes advantage of cheaper valuations and smooths out volatility in your portfolio through pound-cost averaging.
With that logic in mind, when asset prices are depressed, it can present a considerable buying opportunity with a well-thought-out strategy in mind.
Tax sheltering
We’re in very specific economic circumstances at the moment. With high Government debt levels and little in the way of leeway for it to borrow on international markets to fund its agenda, tax rises are coming.
That makes careful tax planning extremely important. Using up allowances for ISAs, pensions and other useful schemes are a great way to soften the blow any taxes rises might bring. But the rules are potentially changing quickly as a result of Government instability, making considered planning tricky.
Tax planning can be a complex process, so unless you’re well-versed in tax laws and financial planning, it’s probably best to get advice to ensure your wealth is working as hard as it can be within the rules.
If you would like to discuss this or any of the other themes expressed in this article, 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 9th November 2022.
Energy rescue package: how does it work?
The Government has announced a wide-ranging and costly energy bills rescue package, called the Energy Price Guarantee, to protect households from the worst of price rises this winter.
Energy bills were set to rise by about 80% in October, having already soared in previous updates to the price cap by energy regulator Ofgem.
Instead, the Government has moved to limit that increase.
How will my bills change?
Energy bills will still likely rise for households, but the worst effects have been dampened by the rescue package.
For a typical household, the annual bill for energy will come in at around £2,500 from 1st October. This is however not a hard limit on energy costs.
The way the cap works is as a limit on the price you pay per kilowatt hour (kWh) of gas and electricity. If you continue to use a lot of kWh to heat and power your home, your bills can still come in higher than the £2,500 ‘cap.’
With the way the cap is structured, there is still an incentive for households to conserve the amount of energy they use as this will still reflect in their monthly bills.
If you’re keen on cutting your usage and therefore bills, it’s really important to submit regular meter readings to your provider and speak to them if you believe your direct debits or other payments are set too high.
The guaranteed level was initially set to last for two years. But thanks to market disruption caused by Government spending plans, the new Chancellor Jeremy Hunt rolled the scheme back to just six months. Hunt has committed to review and update the scheme from April 2023, but it is unclear how the scheme will change at that point.
In terms of how much it will cost the Government, little concrete information is known as it is completely reliant on the market price of energy in the next six months.
Estimates range from £60 billion to around £120 billion, depending on what happens to the price of natural gas. Once the Energy Price Guarantee expires, bills are expected to rise again to around £4,347 per year.
Other help
There is still other help being made available to households through measures previously announced by former Chancellor Rishi Sunak.
This comes in the form of an energy bill discount which will be paid to households from October. This is worth £400 and will be paid monthly over winter automatically to bill payers. There is no need to apply as it will be directly applied and is a universal payment.
The Government is also providing cost-of-living payments to households on means tested benefits, which includes Universal Credit, Pension Credit and Tax Credits. Those households will receive a £650 payment this year, made in two instalments.
Those on disability benefits will also receive a payment of £150, but if you’re eligible for this, it likely already arrived in September.
Older people can also claim the Winter Fuel Payment – which will pay between £250 and £600 depending on your circumstances. Those who receive State Pension or other social security benefits (not including Adult Disability Payment from the Scottish Government, Housing Benefit, Council Tax Reduction, Child Benefit or Universal Credit) will receive the help automatically.
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 October 2022.
What does the falling pound mean for my money?
The pound has fallen considerably in recent weeks and months. But what does that mean for your finances?
Perhaps the most well-reported fall was the sudden plunge on 26 September, which was largely a response by financial markets to the ‘mini budget’ from new Chancellor Kwasi Kwarteng.
Financial markets, in a signal of lacking confidence in Kwarteng’s plans, sold the pound to its lowest ever level – worth $1.03 in dollar terms. It has however rallied somewhat now.
However, there is a longer-term trend at play with the weakness of the pound.
In the past 12 months the pound has declined from a value of around $1.35 to its current level ($1.13 at the time of writing) – representing a 16% decline.
This is mainly down to major global macroeconomic trends affecting the value of the US dollar. Around the world as equities, bonds and other assets struggle, investors look increasingly to just holding dollars.
The main reason these investors look to hold dollars is that the US central bank, the Federal Reserve, is seen at the front of hiking interest rates and reducing the amount of dollars flowing around the global economy through ‘quantitative tightening.’
Thanks to this trend, the pound is among nearly all other major currencies in losing value to the dollar.
But while these are complex trends affecting the whole world, there are some specific effects on our own finances in the UK. Here are the major impacts.
Inflation
One of the least easily-noticed, but biggest issues for a weaker pound is that it will cause more inflation – despite the Bank of England hiking rates to quell rising prices.
This is because the UK economy is highly dependent on imports to supply households with the everyday goods they need.
When the pound falls in value against other currencies, especially dollars for which many major global commodities such as oil are priced, it reduces the nation’s purchasing power.
This makes these products more expensive for us to consume. Although in practice it is difficult to immediately notice the effect, in the long term it will keep the overall level of inflation higher than it otherwise would have been.
Travel
Perhaps the opposite of the above effect – a weaker pound means it is more expensive for people to travel abroad.
When visiting other countries, travellers and holidaymakers will find buying anything they might spend on more expensive as their pounds don’t go as far as before.
This will have varying effects depending on where they go. Europe might not be as much as a stretch thanks to the Euro falling, but a trip to DisneyWorld in Florida might quickly become prohibitively expensive for some.
There are some quick and easy ways to mitigate the worst of foreign exchange rates for holidaymakers though. The most important is to avoid exchanging physical currency at Forex shops, or even at places such as the Post Office. These companies routinely offer foreign currency at extremely high markups compared to the basic Forex conversion rate.
The best solution to this is generally to use new digital-only banks such as Monzo, Starling and Revolut, who offer much better exchange rates and fees for spending abroad and cash withdrawals than old-fashioned High Street banks do.
Investments
A weakening pound also affects investments – but the consideration here can be more complex.
Holders of UK companies that earn in the UK might find that their stocks are worth less as a result of the stock being priced in pounds.
But many major UK firms actually derive much of their incomes from abroad. With a weaker pound this is a good thing for those companies as they will be able to import more valuable foreign incomes. It also makes UK goods sold abroad more competitive to buy, boosting that income for those firms.
Buying companies or other assets denominated in dollars will become more expensive. But the relative value of those assets for those already holding will be a bonus as their sterling value appreciates relative to dollar values.
The effect of pound weakness for investments is complex though and there’s no unifying theme, as individual wealth structures will be impacted differently.
If you would like to discuss any of the themes in this article, 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 20th October 2022.
Mini-budget 2022: market and political turmoil cause major Government reversals
Extraordinary events in the UK throughout September and October have seen the Government announce a ‘mini-budget’ – the contents of which have now largely been scrapped.
Prime Minister Liz Truss, and her first Chancellor Kwasi Kwarteng, announced a series of tax-cutting measures on 23 September.
The Chancellor in his statement said the changes, which were far from mini in reality, were designed to kick-start the economy and provide ‘supply side’ reforms to help businesses grow and let households keep more of their money.
Kwarteng’s announcements were far ranging and were described as one of the most dramatic shifts in policy from the Government since the infamous 1972 Budget from then Chancellor Anthony Barber.
But markets, the media and politicians reacted extremely poorly to the measures which were posing potentially hundreds of billions of unfunded changes to Government policy.
Despite political opposition to the measures, what really killed the mini-budget was the reaction by the bond market – which ultimately would have been asked to fund the measures through new Government debt issuance.
Where are we now?
Liz Truss was forced to sack her Chancellor Kwasi Kwarteng on 14 October. This is because the Bank of England had implemented a special program to support the bond market and protect certain pension funds from running out of cash.
Bank of England Governor Andrew Bailey set a deadline for the scheme of 14 October. This forced Liz Truss’s hand and triggered a series of reversals which initially saw the Government ditch plans to scrap the 45p income tax band, then reverse plans to hold corporation tax at 19% instead of a planned rise to 25%.
Once Truss sacked her Chancellor Kwasi Kwarteng, Jeremy Hunt – a former leadership candidate and health secretary – was brought in as the new Chancellor to steady the ship of Government.
On 17 October, Chancellor Hunt announced the effective scrapping of all the measures set out in the mini-budget. The only surviving measures were the reversal of the National Insurance hike and the stamp duty cut – as both those measures had already been enacted (more on those below).
But the planned cut in the basic rate of income tax to 19% has been binned. When he was Chancellor, Rishi Sunak promised this change in 2024, but Hunt, keen to reassure markets and return confidence to the Government’s economic policies, has scrapped the tax cut completely.
As for other measures, the alcohol duty cut will no longer go ahead, IR35 freelance tax reforms will take place instead of being scrapped, and the Energy Price Guarantee will no longer run for two years (more on that here).
The retreat and reversal of policies has left major questions over Liz Truss’s leadership. Jeremy Hunt was compelled to go further than simply cancelling the changes because the Government had caused a major confidence loss in markets that effectively were on the hook to pay for the measures.
This comes against a backdrop of tough and volatile market conditions, monetary policy tightening and ongoing high inflation. Together, this makes the mini-budget’s measures extremely unpalatable to investors, even if these measures were designed to promote growth and help households in the UK.
A couple of measures have survived however, and these are detailed below.
National Insurance and dividends
The 1.25% hike in National Insurance payments has been fully scrapped, and this will take effect from 6 November. According to the Government, the average worker can expect to save £330 in NI payments in 2023/24.
Dividend tax will be affected by the cut to National Insurance, effectively taking the rate back to where it was before it was hiked in the first place.
Dividend tax rates will be reduced to 7.5% for basic rate payers, 32.5% for higher rate payers and 38.1% for additional rate payers. All of this will take effect from 6 April 2023.
Stamp Duty
Kwasi Kwarteng also made significant changes to the way in which stamp duty works.
No one will pay stamp duty on a property worth less than £250,000 while the first-time buyer (FTB) threshold has risen from £300,000 to £425,000. The maximum level of FTB relief will also raise from £500,000 to £625,000.
These changes were made effective immediately from 23 September.
If you would like to discuss any of the themes raised in this article, please 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 20th October 2022.
Working for longer? Key rules to consider
The number of over 65s has reached a record level, according to new data from the Office for National Statistics (ONS).
The number of over 65s now in work stands at 1.468 million in April to June 2022, up 173,000 from the previous quarter (January to March 2022).
As the cost-of-living rises, and markets turn volatile, more older people are returning to work in order to fund their everyday lives.
But there is also a longer-term trend at play – the number of over 65s in work has risen steadily since 2014 as per the ONS figures.
But what are the pitfalls of working past ‘retirement’ age? The truth is that the line between working age and retiring is definitely blurring, but there are still some important aspects to consider if you’ve decided to keep working for longer.
Here are some key considerations with regards to wealth and tax.
Money Purchase Annual Allowance
The Money Purchase Annual Allowance (MPAA) is a key consideration if you choose to work later in life, and have access to your pension (i.e., over the age of 56).
When you contribute to your pension during your working career, you’re allowed to save up to £40,000 a year into your retirement pots, or 100% of your annual income if below this level.
However, once you reach pension freedom age, currently 55, and you access pension funds, the MPAA kicks in.
The MPAA is currently £4,000. This means once you’ve drawn down funds from a pension, you are only allowed to contribute back in a maximum of £4,000. This includes personal, workplace and employer contributions.
If you are around pension freedoms age, continuing to work and don’t necessarily need your pension cash, it can be wise to leave it untouched to prevent the MPAA kicking in. This will allow you to continue accruing valuable employer contributions and tax relief on your pension savings.
If the MPAA has kicked in, it could be more tax efficient to save into an ISA instead. This will give you an annual tax-free savings limit of £24,000 (£4,000 for pension and £20,000 for ISA).
State pension deferral
Once you reach State Pension age you will be entitled to claim the valuable benefit, assuming you have accrued enough National Insurance Contributions (NICs) in your working life.
The age at which you can take State Pension used to be 65 for men and 60 for women. This has however now been equalised between genders and is in the process of rising to 68. You can find when you become eligible by using the Government website.
If you are eligible but have yet to take your pension, or are soon to be eligible – it can be a very good option to defer receipt of the benefit, if you can live without it.
This is because the longer you defer your payments, the higher your future pay outs will be. The State Pension increases by the equivalent of 1% for every nine weeks of deferral. This means for every year you don’t claim, you’ll get around 5.8% more when you do begin to claim.
For instance, if you’re eligible for the full weekly amount of £185.15, deferring it by 12 months will mean an extra £10.70 a week if you begin claiming one year after reaching full entitlement. Over a year, that adds up to an extra £128.40.
These figures are however purely an example – in practice the State Pension is uprated using the triple lock calculation each year so deferral will most likely lead to higher extra payments in future.
No National Insurance
Once you do reach State Pension age, you will no longer be liable to pay National Insurance (NI) contributions.
Any money you earn won’t be liable to NI contributions, which will mean ultimately, you’ll get more money in your pay packet at the end of the month. Pension income, likewise, doesn’t have any NI liabilities. You are however still obliged to pay income tax on any earnings – be they salary or State Pension income.
If you’d like to discuss any of the rules or tax implications for your wealth, don’t hesitate to get in touch to talk about your options.
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 October 2022.
Should I pay my child’s university fees?
No-one wants to see their child struggle financially but how much should parents be helping out with university fees, or should they rely on student loans?
Going to university isn’t cheap for a young person, even if they live on baked beans and pasta.
The cost of studying at university is estimated to be around £57,000 for a three-year degree, according to SaveTheStudent.
That is around £19,000 per year, so your loved one could still be in touch for more than just help with their washing.
The costs
Tuition fees alone can cost up to £9,250 in England, Wales and Northern Ireland or £27,750 for a three-year degree.
There are no tuition fees in Scotland if the student has been living in the country for three years.
Additionally, a student will also need to pay for materials such as books as well as their own food, energy and accommodation.
SaveTheStudent’s National Money Survey estimates living costs of around £9,720 or £29,160 over three years.
Adding that to three years of tuition fees takes the total cost to £56,910 – more than double the average salary in the UK.
But there is help available.
All students can apply for a tuition fee loan to cover the annual university bill.
UK nationals who are studying for the first time can also usually apply for a maintenance loan to help cover living costs, which varies depending on the university and your household income.
But leaving university with large debts may make it harder for your child to get on the property ladder or access other credit as it will form part of the affordability criteria in applications.
It is easy to see why parents may be tempted to help their child with these costs instead.
Paying your child’s university fees may help give them a more financially stable start in life as it could be easier to access an affordable mortgage rate or other credit if they don’t have a large level of student loan debt.
Here is what to consider.
Financial independence
University is likely to be the first time your child lives alone and learns the importance of running a household and budgeting.
This could be a good chance for them to learn how to setup and pay bills or to put money aside for essentials such as the food shop and their studies.
There a risk of spoiling them if you pay for everything.
Would it be better for your child, and your wallet, if they got a job to cover their costs or if you just made a small contribution each month to get them started?
Will you have to pay anything?
University costs may look daunting but the repayment terms on a student loan are different to traditional finance and it may be that the debt never actually has to be repaid.
Student loan repayments only become due in the April after graduation and only once the borrower reaches a certain annual earnings threshold.
The threshold depends on when a student started their course, but it is currently £27,295 for an English or Welsh student who started a course anywhere in the UK on or after 1 September 2012.
It functions, in effect, as a 9% income tax levy above this threshold. Any student debts are cancelled 25 years after the first April the student was due to repay.
While this dampens their earnings potential it won’t affect aspects of their finances such as credit rating. Mortgage providers will take into account how much they’re paying off each month as a part of income considerations but won’t consider the size of the ‘debt’.
Some employees may not earn above the minimum threshold and may not ever fully repay the loan, so paying for them may just be wasting your money.
Can you afford to wait?
Rather than paying upfront, you could wait until the end of your child’s degree. If they look likely to earn above the repayment threshold, you could then step in and help.
This way, your child will also have hopefully learned how to manage their money during university.
Alternatively, your child may end up with a highly paid role that makes it easy for them to pay off the loan quickly.
Can you afford to help?
Don’t give away money you may need for your own bills, retirement or care needs.
That is especially important at the moment with inflation, or the cost of living, expected to hit 13% over the next few months.
This could mean higher energy and food bills, while mortgage rates could get more expensive as interest rates rise to curb inflation.
Alternatively, you could put money aside for another use such as to help your child with a mortgage deposit once they graduate.
It may be worth speaking with a financial adviser to see how paying your child’s university fees fits in with your own financial plan and the best way of using the money.
Pension opt outs are rising – but foregoing a pension could cost you thousands
Increasing numbers of employees are opting out of their workplace pensions as the cost-of-living crisis bites but experts warn this could leave future retirees out of pocket.
Inflation has already hit a 40-year high of 10.1% and the Bank of England predicts it could go as high as 13%, with some forecasters even warning the figure may hit 18% or higher.
That means increased bills for everything from energy to food, travel, clothes and holidays.
The Bank of England has already begun increasing the cost of borrowing – the base rate – in an attempt to bring inflation down.
That will mean higher interest on loans and mortgages and higher energy costs which could also add to financial pressure on households.
It is no surprise that households are looking to cut back on their expenses in a bid to preserve at least some of their cash.
Many are looking at their pension contributions and wondering if the money can be used immediately rather than for their retirement to help get over rising cost pressures.
Analysis by online pension provider Penfold has found that the number of savers opting out of company pension schemes increased 29% from March to July this year, just as the cost-of-living crunch began to make its effects felt.
While this may save you money and release some spare cash in the short term, the impact could be felt much longer-term and mean a poorer retirement.
Pete Hykin, co-founder at Penfold, comments: “Everyone understands that the pressures facing today’s savers are considerable”.
“Many people are feeling the pinch on their incomes and savings, but it’s vital that those people who are financially able to pay into their pension continue to do so”.
“The increasing number of opt-outs is a worrying trend, especially as the impact of pausing contributions, even for just a short period, can have a hugely detrimental impact on an individual’s finances in retirement, especially for those starting out in their career.”
A 20-year-old stopping a contribution of £200 per month would miss out on £28,000 in their pension pot from stock market performance if this was carried on for a three-year period.
That means less money for your golden years at a time when you may not be working and may not have other sources of income beyond a state pension.
You would end up having to invest more once you restarted contributions if you wanted to catch up.
Although it is especially tough at the moment, it’s essential to maintain contributions and make cost savings elsewhere if possible. Ultimately cutting off your long-term wealth growth to beat a short-term problem is going to harm your finances either way.
Inheritance disputes are soaring – here’s how to avoid painful family quarrels
Disputes around how a person’s estate should be distributed are soaring official figures show, attributed to poorly drafted, or the lack of, wills to set out their wishes.
Planning for what happens after you die may seem morbid, but it could help prevent extra stress and upset – as well as a large bill – for those you leave behind.
Research by law firm Nockolds shows there were 9,926 challenges to how inherited estates are managed and distributed – known as probate – in England and Wales in 2021.
The figure was up 37% compared with 2019, according to a freedom of information request (FOI) made by Nockolds and reported by the Financial Times.
Experts warn that an increasingly litigious society and rising house prices could be driving more people to block probate and try to take a share of or control a deceased relative’s estate.
This hasn’t been helped by the rise of online DIY services that let people prepare their own will online by answering a series of questions without consulting a lawyer.
Without clear instructions, family members could easily disagree about issues such as how you want to be buried and what happens to your hard-earned assets such as your savings and your home once you die.
Here is what to consider.
Make your wishes clear
The best way to avoid family disputes is by writing a will.
This is a legal document that sets out who should manage your assets and liabilities – known as your estate – and who should receive any of your wealth or possessions.
Research by Royal London shows 56% of adults in the UK don’t have a valid will, rising to 79% for 18–34-year-olds.
Without a valid will, your estate falls under the rules of intestacy.
This means that regardless of who you may have chosen, the law dictates the order in which people inherit your estate.
Under the intestacy rules, a spouse or civil partner is automatically recognised as the person who should benefit the most, followed by children.
This may create an issue if you have been living with someone but weren’t married or in a civil partnership.
They may not have any rights to your estate, even if you wanted to leave them your home or other possessions as there would be no document setting this out.
Avoid disputes
Just writing a will online may not be enough, especially for more complex issues.
An automated will writing service may not raise issues to consider such as if you are divorced, remarried or have children from different relationships, all of which could lead to different claims on your estate.
If there are disagreements or parts of the document are unclear, your will could be deemed invalid and moved to the intestacy rules.
Alternatively, your loved ones could end up in court to contest it, which can mean expensive legal fees. There are ways to avoid this before you pass away.
Some DIY services will let you pay extra for a lawyer to check your will, or you could consult a solicitor directly to ensure the document reflects your wishes and situation.
It is also important to review your will if your situation changes.
Royal London research shows six in 10 people haven’t reviewed their will in over a year, with 29% leaving it more than five years.
Plenty could have happened in that period such as a new child or property.
Inheritance tax
Your will is also an important inheritance planning tool.
Currently inheritance tax of 40% is paid on any assets worth more than a nil-rate band threshold of £325,000, plus £175,000 for your main residential property.
There is no inheritance tax between spouses though, so you can reduce the liability of your estate by passing on assets to your husband, wife or civil partner through a will.
You can also leave money to charity through your will and if you donate at least 10% of your estate then the inheritance tax rate drops to 36%.
None of this would be possible without a clear and concise will, saving your loved ones tax, legal fees and heartache.
Rail fares set to rise by less than inflation
Commuters braced for rising energy bills and higher borrowing costs may find their rail fare increases aren’t as bad as expected next January.
Despite train companies being private companies, the Government has the power to limit increases on some rail fares to ensure they do not exceed the cost of living and remain affordable.
Around 45% of all rail fares are subject to the Government’s cap including season tickets on most commuter journeys and some off-peak return tickets.
The increases usually take place each January and are linked to the retail price index (RPI) from the previous July.
Other services that link bills to RPI include broadband and mobile phone networks, which argue that increasing customer bills help maintain services and infrastructure.
This is a contentious enough issue as its calculations no longer meet international standards and it tends to be higher than the more widely recognised consumer price index (CPI).
Another issue is the actual RPI rate as a high measure can mean rail tickets are too expensive for travellers.
If train fares were to increase by July’s RPI rate next January, they could go up by 12.3%, the largest ever increase amid the ongoing cost-of-living crisis.
It wold mean, for example, that commuters travelling between Reading and London on any route would have to pay an extra £620 for the new season ticket cost of £5,664.
But the Government has instead said fares will not go up by so much and will be frozen until at least March 2023.
A Department for Transport spokesperson comments: “The Government is taking decisive action to reduce the impact inflation will have on rail fares during the cost-of-living crisis and will not be increasing fares as much as the July RPI figure.
“We are also again delaying the increase to March 2023, temporarily freezing fares for passengers to travel at a lower price for the entirety of January and February as we continue to take steps to help struggling households.”
Similar action was taken during the pandemic to give commuters more time to purchase tickets at lower prices.
The Government hasn’t confirmed how much the new cap will rise by, but this is usually confirmed each December.
Source:
https://commonslibrary.parliament.uk/how-much-could-rail-fares-increase-by-in-2023-and-why/