How might recent government measures affect your wealth?

Government measures to aid the economy could impact on your personal finances.

Recent measures taken by the government to support the economy in the wake of the pandemic will undoubtedly have knock-on effects that might influence how you should plan your finances. In this post, we look at some of the potential effects of these economic stimuli, as well as how you can manage their impact on your investments

 

Inflation and low savings rates

Inflation remains some way below the UK’s target of two per cent,1 but the government’s economic measures may bring price rises in the long term. Quantitative easing, which expands the monetary base in the economy, is usually believed to cause price rises, although this isn’t always the case. A tendency towards ‘deglobalisation’, caused by the pandemic, may also contribute to inflation.

Inflation and low interest rates cause a double whammy for consumers, because the value of money in savings accounts with low rates is eroded away. Currently, the Bank of England rates are at a record low of 0.1 per cent,2 meaning it is hard to find accounts that allow your money to grow in value.

Well-considered, diversified investing can help you to protect your assets against inflation.

 

Falling annuity rates

Annuities, which provide you with an annual income for life, were the traditional way that most people without final salary pensions provided for retirement.

Many people are still most comfortable with the guaranteed element of an annuity, but the fiscal measures taken in response to the coronavirus have driven annuity rates to further lows. Rates were already low due to the quantitative easing demanded by the financial crisis of 2007.

Under quantitative easing, the Bank of England buys up gilts, meaning the yields on those remaining available to investors fall. While gilt yields are low, so is the level of income the insurer can promise to pay to the customer.

While annuities are still the right product for some customers, others may benefit from taking advantage of the relatively new opportunity to leave pension money invested until it is needed. This will need careful research and understanding, and many people might consider speaking to an independent financial adviser to ensure they make the right decision.

 

Tax increases

Coronavirus has caused the government to borrow record amounts of money. The Chancellor’s most recent measures are likely to push Britain’s deficit further above £300 billion,3 which Carl Emmerson, deputy director of think-tank The Institute of Fiscal Studies, describes as the highest amount as a share of national income since the second world war.

“Future fiscal events are likely to involve a less pleasant set of announcements over the extent to which taxes need to rise to restore the health of the public finances,” he warns.3

These tax rises will not come immediately, which means that now is the time to make the most of tax breaks available to you and to ensure that you use all your tax allowances.

These include your Capital Gains Tax Allowance, which is the amount of tax you pay when you dispose of assets, including second homes and shares. The rate of this tax was cut in the 2016 budget, but HMRC is currently reviewing the tax, and some experts expect rates to be raised again.

A financial adviser can help you to make the most of your annual allowance for Capital Gains Tax, as well as the ability to carry forward allowances from other years.

Another tax break that is frequently touted as ripe for removal is that available for higher and additional rate taxpayers paying into pensions. This can be worth a considerable amount to higher earners and it makes sense to maximise contributions now to make the most of this.

For personalised advice on how to protect your investments and wealth from any potential effects, speak to one of our financial advisers. They can help you create a tailored financial plan that meets your financial and investments goals. Your first meeting is free and there is no obligation to continue.

 

The information in this article is for generic purposes only and is not intended to suggest a suitable investment strategy. All investments carry a degree of risk which means that you could receive back less than your initial investment amount. You should seek financial advice before proceeding with any course of action.

 

1. https://www.bankofengland.co.uk/monetary-policy/inflation
2. Correct as of 28th August 2020. Source: https://www.moneyadviceservice.org.uk/en/articles/interest-rates-explained
3. https://www.politicshome.com/news/article/bill-for-coronavirus-battle-nears-190bn-including-15bn-on-ppe-for-frontline-staff