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The UK budget contained a mixture of giveaways and takeaways; its impact on the public depends on individual circumstances. One consistency with each Chancellor is that the budget is always presented as a positive initiative from a forward-thinking politician! Rishi Sunak followed the trend, basing his tax and spending decisions on “levelling up” and “a new age of optimism”.
As most of the contents had been leaked beforehand, there wasn't much scope for pulling the traditional rabbit out of the hat. Overall, there was much tinkering around the edges, backed up with a mini spending splurge, based on the expectation of increases in productivity and Gross Domestic Product growth. Interestingly, many political commentators compared this budget to those delivered by Gordon Brown rather than George Osborne.
The UK budget must rely on economic forecasts provided by the Office for Budget Responsibility (OBR). If the growth estimates are correct, Sunak should be able to deliver on his promises. If not, then we may be looking at a revision some time next May.
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UK Budget changes
A significant change for future retirees is that from 2028 the minimum age at which someone can access their personal pensions and SIPPs will be raised to 57 (from the current 55).
For expat retirees, there was little to get excited about. However, it is worth noting that the ‘triple lock’ for UK state pension payments was amended in May to become a temporary ‘double lock’. The triple lock ensures UK State pensions are increased annually by the higher of inflation, wage growth or 2.50%. Covid created an unusual situation whereby wage growth for 2020 was more than 8% due to employees coming off furlough schemes and the economy picking up.
This posed a problem for the Chancellor, as he would theoretically have to increase pensions by this amount. Although controversial, he imposed a temporary hold on wage growth as part of the formula. Pensions will therefore rise by 2.50% or inflation. However, with the OBR forecasting that inflation would rise to 4% per annum in 2022, UK retirees might be in for an unexpected bonus.
The budget and inflationary pressure
Inflation has always been the enemy of Chancellors. Indeed, Sunak has specifically raised the issue with the Bank of England, asking them to confirm they will do everything in their power to suppress it.
The rise in inflation could lead to higher prices in the shops and possibly increases in interest rates. It is unlikely that any increase will make a huge difference to bank deposit holders' wealth; however, mortgage costs may rise as the cost-of-living squeeze begins to bite.
With low interest rates and high inflation, anyone holding investments in low-yielding assets such as Government Bonds or bank deposits will see their net 'real return' fall and the spending power of their savings reduce. For example, if interest rates are 1% and inflation 4%, the value of bank deposits will reduce every year by 3%. The question therefore is what can we do to combat this and produce a positive real return?
Alternative investments
Equity markets have been providing excellent returns for some years, especially since the financial crisis of 2008. Crypto-currencies are becoming more mainstream with the value of certain coins having risen in spectacular fashion. At the same time, Bonds have lagged behind and are now producing negative real returns. It’s impossible to say how markets will react in the future and whether Crypto might be in bubble territory. However, equity markets have been relatively quiet in 2021, indicating a consolidation following the recovery after Covid.
We are noticing an increasing appetite for Alternative Investments. Alternatives are non-correlated to traditional markets and should therefore provide an element of protection against falls in Equities. There are myriad choices available investing in all sorts of sophisticated financial instruments and securities. They have a part to play in most people's investment planning; however, as they are complex and non-mainstream, it's vital to ensure that you fully understand the technical data and real risks. Too many times in the past decade have we seen unregulated investment funds go wrong and investors lose some or all of their money. Be careful!
Seek professional advice
When faced with uncertainty, it is always best to review your financial planning strategy and seek professional advice. It might be time to reassess your risk profile. You may be expecting a change in lifestyle which you didn't originally foresee; changes in tax laws may affect you. A qualified adviser will guide you in the right direction.
When deciding which areas to invest in and which to cut, the Chancellor consults with his immediate team, along with the OBR and Bank of England. Together they assess the current state of the country's finances and use assumptions and forecasts to predict the future.
Chancellors try to help people and businesses by introducing or enhancing tax benefits to stimulate the economy. For individuals, it’s important to make sure we are taking full advantage of the tax benefits available in the countries we live in to optimise our financial planning strategy. For expats in Spain, France, and Portugal, there are a number of tax breaks available to those who choose to invest in tax-compliant insurance bonds.
In conclusion, it's always good to review your financial plan. As the current UK Chancellor has found out, unexpected events require unprecedented actions. As we slowly emerge from the worst days of Covid, we recognise that things have changed and the need to react to the new world.
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