The Spring Statement and the cost of living
Yesterday’s Spring Statement is in the headlines today. Rishi Sunak opened by highlighting the economic impact of Russia’s war on Ukraine, but while it undoubtedly places an additional burden on our economy, inflationary pressures and energy prices had already set the UK on a difficult path for the cost of living.
The headlines of Sunak’s statement1:
- A reduction in fuel duty of 5p a litre from 6pm on 23rd March 2022 and last for 12 months.
- VAT on the installation of energy saving materials will fall from 5% to 0% for five years from April.
- An increase in the National Insurance Contributions (NIC) thresholds of £3,000 to £12,570 for employees and self-employed individuals from this year.
- The basic rate of income tax will reduce from 20% to 19% from April 2024.
- The household support fund will be doubled to £1billion from April to support vulnerable households
Inflation and interest rates are rising. How can you ensure your investments and future plans remain on track?
Soaring energy bills, the rising cost of a weekly shop and the Bank of England’s monetary policy committee (MPC) has voted for a rise in interest rates, to 0.75%. Meanwhile, the bank also predicts that inflation will be pushed higher than first expected, to reach more than 7% in the spring,2 far beyond their 2% target.
The focus in the press is rightly on how many households will cope as they are squeezed in all directions. For those who can, it’s a time to donate to foodbanks and charity. The Trussell Trust and other organisations are working hard to save people the choice between heating and eating, and always welcome more support.3
However, you may also be wondering about your investments and the potential impact on your future financial plans.
Here’s our advice to help your finances weather the coming storm, including both financial planning and investment strategy.
Review your financial plan
This is always the sensible first step to make sure you remain on track to meet your lifetime goals. All financial plans should be reviewed annually with the support of your adviser, but a drastic change in the economy is a very good reason to prioritise it. If any shortfall is identified, there are plenty of options, such as considering your desired retirement age, how much you need to save and the level of risk you are taking with your invested assets. As always, knowledge is power, so a review is about understanding the current situation to plan more effectively for the future.
Of course, if you’ve not yet created a financial plan, that would be your first step. We would firstly establish your lifetime goals, before assessing your current situation and determining how close you are to achieving your goals based on aspects such as your income, expenditure, assets and liabilities.
Invest surplus cash
In a high inflation situation, cash savings don’t make much sense, becoming worth relatively less over time. In most cases, over recent years, the effect of holding money in cash will have been a negative real rate of return – meaning your money loses spending power. However, it remains important to have an emergency reserve in cash that you are comfortable with, that can factor in any unexpected, short-term expenditure. Any surplus cash can be invested efficiently.
Protect your savings
By reviewing the cash savings that you do decide to keep in reserve, you can ensure you find the most competitive interest rate to help fight inflationary concerns. As always, using your ISA allowance will help maximise savings.
Check expenditure
As prices rise, many of us will be double-checking our expenditure to make sure we are not paying over the odds. It often pays not to automatically renew your gas or electric supplier, or car or home insurance – often prices can jump dramatically, and a little shopping around can lead to significant savings in comparison to settling with the default. It’s always helpful to check your direct debits too – any neglected gym memberships or subscriptions you no longer want still coming out of your account?
Review your mortgage
Now is the time to fix your mortgage rate if possible. With interest rates on the rise, and more likely in the pipeline, the mortgage market gradually starts to factor in any potential future rises too. Acting quickly means you can lock in at a lower interest rate than might be available in the coming months, and therefore gain certainty over the next few years.
Diversify
There is a lot of sense in the adage ‘don’t put all your eggs in one basket’ and the most resilient investment portfolio is frequently the most diverse. That means diversity of both ‘what’ and ‘where’. Look for a global focus, rather than just UK, and include equities and alternative assets such as infrastructure, renewable energy and specialist property investments.
Equities are traditionally considered as an effective mitigation against steadily rising inflation, as companies can change prices thereby protecting their revenues. Many of the infrastructure projects that are invested in have inflation protection built into the underlying contracts which provides some protection and can provide pricing power.
Take the long view
Short term fluctuations don’t necessarily mean your investments are off-track. We are long-term investors, typically planning for a minimum of ten-years, and taking this approach means that any immediate volatility in the markets will not prevent you reaching your longer-term goals. Check out our recent article on taking the long view.
Seek expert opinion
Just as Dr Google can give you health advice that may not be backed up by your GP, we live in a time when anyone on the internet can dish out financial advice. Always check that advisers are regulated by the Financial Conduct Authority. At Holden & Partners we are also Chartered, which is the pinnacle for financial planning firms.
In a rapidly changing financial environment, the support and advice of an expert adviser who understands your situation is essential.
We have received lots of positive feedback about our updates. If you’ve found them useful and informative, we would be delighted for you to share them with friends, family and work colleagues. We are always keen to spread the word about our unique approach to financial planning and investing.
Please note that any thresholds, allowances, percentage rates and tax legislation stated may change in the future. The content of this communication is for your general information and use only; it is not intended to address your particular requirements. This communication should not be deemed to be, or constitute, advice. You should not take any action without having spoken with your usual adviser.
1 https://www.gov.uk/government/publications/spring-statement-2022-documents
2 Bank of England raises interest rates to 0.5% | Interest rates | The Guardian