Inflationary pressures rise

UK interest rates have now remained at their all-time low of 0.5% for over a year. The UK appeared to creep tentatively out of recession but the new Government is now anxiously looking at ways to cut costs without derailing a still fragile recovery.

However, the UK Consumer Price Index was still 3.1% in July. In his most recent open letter to the Chancellor of the Exchequer, in May, the Governor of the Bank of England (BoE), Mervyn King considered these levels to be the result of “temporary factors” and suggested inflation will fall back below the Government-set target level of 2% "within a year". Even taking King’s explanation for the rise into consideration, it is worth remembering the rate of inflation has almost doubled since November 2009. Indeed, only a few months ago, deflation seemed the more credible risk. In normal circumstances, the BoE would increase the cost of borrowing in order to cool inflation. However, rates are unlikely to rise in the short term because policymakers fear higher interest rates could endanger that economic recovery.

Low interest rates are generally good news for borrowers, but are bad news for savers, who have already endured a year of exceptionally low interest rates. Returns on cash are meagre and relatively high inflation is eroding the real value of cash. At least in the short term, Britons face the combined problems of high inflation and rising taxes, both of which will put additional – and unwelcome – pressure on disposable income.

Funding a decent income

When making plans to start any pension plan, the first thing to consider is how much income you think you will need. Few people need as much income in retirement as they do while working – the mortgage may be paid off, children will likely have left home and day-to-day expenses will probably fall. However, with more leisure time available, you may have some ambitious plans for travel. All this needs to be considered so you can set some realistic expectations. Once this target figure has been determined, you can then begin to decide how much needs to come from a pension and how much can come from other means. For example, the state pension is £97.65 a week (for 2010/11), plus you may have money in ISAs or from rent from second properties. You may also decide to work part time or take some other type of temporary paid employment. Pension plan savings are then the first step in working out how to make up the difference. Unless you already have a significant work or personal pension arrangement in place, some form of additional saving will be required to meet your target. Just to give you an idea, using annuity best buy tables published in April 2010, because interest rates are at very low levels, £10,000 worth of annual income for a male aged 65 (with no guarantees built in) will require a pension fund valued at over £150,000. For females - or for those wanting to retire earlier than 65 - the fund required will be even higher. Hence the need to start planning and the earlier you start, the easier reaching your target will be.

Emergency Budget Snapshot 2010

The Chancellor has announced today the Coalition Government’s first Budget.
This is not intended as an in-depth analysis of the Budget speech (we will leave that to the real experts) but we hope this quick snapshot helps you gain a quick grasp on the key points:

Tax
VAT to increase to 20% from 4 January. Current zero-rated items to remain exempt for whole of current Parliament.
CGT to increase for higher-rate taxpayers to 28% from 23 June 2010. CGT to remain 18% for basic-rate taxpayers and the CGT tax-free allowance to remain £10,100 this year.
The CGT entrepreneurs rate of 10% to be extended to the first £5 million of lifetime gains.
Personal income tax allowance to be increased by £1,000 in April 2011 to £7,475. Higher rate threshold to remain frozen until 2013.
The April 2011 introduction of taper on higher rate tax relief on pension contributions by high earners to be reviewed.
Insurance premium tax to be increased from 2011. Higher rate to be 20%, standard rate 6%.
Councils that propose low council tax increases to be offered additional funds to allow them to freeze the tax for one year from April 2011.

State benefits and pensions
Benefits, tax credits and public service pensions to be increased in line with CPI rather than RPI from 2011.
Basic state pension to be linked to earnings from April 2011.
Pensions guaranteed to rise in line with earnings, prices or 2.5%, whichever is greatest.
The increase in the state pension age to 66 to be accelerated.
Child benefit to be frozen over the next three years.
Tax credits to be reduced for families earning over £40,000 from 2011.
Child element of the child tax credit to be increased by £150 above indexation in 2011.
Sure start maternity grant to go to the first child only.
Cap on housing benefit to be introduced - from £280 a week for a one-bedroom property to £400 a week for four bedrooms or larger.
Medical assessment for Disability Living Allowance to be introduced from 2013 for new and existing claimants.

Businesses
Corporation tax to be cut to 27% in 2011 and by 1% a year over the following three years to 24%.
Small companies rate to be cut to 20% in 2011.
Employer’s NI threshold to increase by £21 a week above indexation in April 2011.
Tax relief for video games industry to be scrapped.
Bank levy to be introduced in January 2011 to apply to balance sheets of UK banks and building societies and UK operations of foreign banks.

Duties
No increases in fuel, alcohol and tobacco duties.
Planned increase to duty on cider by 10% above inflation reversed.

Public sector pay
Two year public sector pay freeze to be introduced on staff earning more than £21,000.
People earning less than £21,000 to receive a flat pay rise worth £250 in each of the two years.

Internet
Planned landline tax to be scrapped.

If in doubt, disclose

When taking the decision to buy any type of protection policy, you do so to gain the peace of mind that, should something happen, your income or your family will be covered. However, we are continually hearing that policy providers find ways to turn down claims - and always this happens just when the people concerned needed the money most. So why would a provider turn down a claim? The primary reason will be that the insurer finds some incorrect, missing or incomplete information on the original application forms. This is called 'non-disclosure' and examples include details such as claiming to be a non-smoker, reducing your weight significantly, not checking the status of a dangerous hobby (sailing, skiing or maybe even horseriding) or simply not owning up to an existing medical condition, even if you thought at the time it was irrelevant. If such details are uncovered, they can make any policy you thought you bought in good faith, completely invalid. For this reason, particularly for any sickness related plans (eg: critical illness or income protection), it is sensible to seek Independent advice. Such plans may all carry the same name but the conditions they cover and the exact definitions they use for those conditions can vary widely. Covering yourself against any unforseen circumstance can appear to be an expensive business when you first start the conversation. It is therefore absolutely vital that you get the type of cover right - and don't give your insurer any reason to be able to get out of your claim should you ever have reason to need it.

Use your tax breaks

Benjamin Franklin's view that nothing is certain except death and taxes has yet to be disproved. However, using the tax allowances granted by the Government can at least help mitigate the tax side. At the basic level, there is a personal income tax allowance, an annual exemption from capital gains tax plus numerous tax credits dependent on your circumstances. Schemes like Gift Aid offer tax relief on donations to charity and there is also an Inheritance Tax (IHT) threshold below which nothing is due. Alongside, there are tax efficient investment products, such as Individual Savings Accounts and pensions, which provide relief from both income and capital gains tax (CGT) to differing extents. In addition, some individual assets are specifically exempt from CGT - your home, your car, certain personal jewellery, antiques and UK Government bonds (gilts). In terms of IHT, for the 2010/11 tax year, the threshold is £325,000 (£650,000 for married couples and civil partners) and the value of your estate above this is liable to tax. This can leave beneficiaries having to sell family heirlooms to pay the tax bill. However, there are exemptions available from this tax as well, and a little bit of planning can help you access the range of annual exemptions and allowances in advance. This can help you reduce the liability as far as is practical – or provide the means with which your beneficiaries can pay it without having to sell items of sentimental value.

Planning for a market downturn

As an investor, you understand that different asset classes and industry sectors are liable to turn against you from time to time. Despite equities' long-term potential, both the meltdown of the 'dot.com' boom and, more recently, the credit crunch fallout demonstrate things are much less certain in the short term. Similarly, bonds are viewed as medium to lower-risk investments, particularly when economic growth is on the wane. However, holders of some bonds over the period since the crunch first hit would have suffered. Many investors, faced with such downturns, tend to panic. They see only the shortterm loss on their portfolio balance sheet and forget their reasons for investing. Sadly, this is the worst thing they can do – and it is why planning at the outset of any investment is worth every minute spent. If you know why you are investing and understand fully the risks involved, market downturns should never have such an impact. If you are far-sighted and have a degree of nerve, they can even be an opportunity. Such downturns can be wide-ranging and indiscriminate, meaning the share prices of high-quality companies can suffer alongside lower-quality peers. This gives canny investors the opportunity to add to their portfolio at bargain prices. However, for most, the best strategy is simply to protect yourself while the market settles down. Nothing in a portfolio is more valuable than the time you spend achieving balance, diversification and cementing that long-term objective.

How to build your portfolio

The word 'portfolio' is simply a shorthand term for the collection of investments you own across all your accounts. Ideally this will be spread across a variety of assets - equities, bonds, property and cash - in a mix that has been determined by that your specific objectives. The process of deciding how much to invest in each asset class is known as asset allocation. For example, equities have traditionally offered higher returns over the long term but at the price of increased risk while, at the other end of the scale, cash has offered both security of capital and stability but with a fluctuating income and no chance of capital growth. Actual returns are dependant on many variables, such as the health of the economy in which you are invested, inflation, interest rates and market sentiment. The elements that impact each asset class vary and as a result, one asset might be doing very well at the exact same time another is doing badly. However, it is difficult to predict which one will be doing well - or badly - at any one time. Hence, if you mix the asset classes together and have a little bit of exposure to each, this can help balance out the peaks and troughs of the individuals. Your age, your financial position and your attitude to risk are all crucial considerations to make sure you get the proportions right and build the most appropriate portfolio. It is therefore helpful to speak to an expert who can more easily help you achieve the right mix.