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Inflation remains the key fight for your finances

One day before the Autumn Statement, official data showed UK inflation hit a 41-year high of 11.1 per cent. So it was no surprise that chancellor Jeremy Hunt said his principal objective was to help the Bank of England defeat domestic price rises — which are forecast to remain at 7.4 per cent next year.

But this only serves to highlight the lack of inflationary uplifts to the tax-free allowances for savers and investors. The chancellor seems to think anyone with surplus savings is in the category he describes as having “the broadest shoulders” — justifying his cuts to the dividend and capital gains tax allowances.

Does this set the tone for a further whittling down of our valuable allowances? I fear so.

The standard pension lifetime allowance has been £1,073,100 since 2020 and remains frozen — penalising successful investment strategies as well as those who have been committed to contributions. Similarly, the pension annual allowance has been stuck at £40,000 since 2014, and the annual individual savings account allowance of £20,000 hasn’t risen since April 2017.

If you didn’t get an inflationary pay rise, you’d protest. And it should be the same with the allowances provided to help you pay your way into retirement. So write to your MP.

Meanwhile, if you didn’t get round to a spring or summer clean of your finances, then autumn can be a good time to take stock, mitigate the damage from icy tax grabs and stealth freezes, and consider how to prevent inflation from eroding your money.

On the one hand, the tax situation is not as bad as might seem — the allowances remain generous and HMRC stats show they are infrequently used to the max. Plus, the chancellor caved in to pressure on the bedrock of retirement income: reinstating the state pension triple lock, meaning the benefit will rise by 10.1 per cent in April.

But there are no guarantees that the triple lock will go untouched for a second year. Although the Bank of England has predicted inflation may drop to 7.9 per cent by the third quarter of next year, keeping the triple lock in place for 2024 will remain expensive. If inflation remains high, I can’t see how giving pensioners inflation-linked uplifts is sustainable when nurses and other public sector workers strike for the equivalent.

And while the chancellor gives with one hand, he takes (some) away with the other. Freezing income tax thresholds at a time of soaring inflation is a stealthy way of raising more tax from all age groups.

The combination of the state pension rising to £10,000, plus inflation-linked uplifts to workplace public and private sector pensions, means at least half a million more over-65s will have to pay income tax, according to LCP calculations.

Meanwhile, there’s a government state pension age review coming in January 2023. Anyone under 50 should expect their state pension start date to be pushed to age 70 and, in the case of the under-45s, possibly age 75.

That’s even more reason to invest now to plug the gap. And to use Isas, which not only shelter savings from dividend and capital gains tax but also won’t be subject to tax grabs in retirement.

If you’re very well off or have received a windfall, remember to use your spouse’s allowances, too, and consider children’s Junior Isa allowances — set at £9,000, annually.

Investors with taxable investments can use Bed and Isa facilities — to sell tax free and then reinvest via the tax shelter — to mitigate the cuts to the capital gains and dividend allowances. In addition, higher rate taxpayers can transfer taxable investments to family members in lower tax brackets.

All those approaching retirement should consider maximising their pension contributions, too, as the upfront tax relief generates a return on the investment that can help beat inflation.

Higher rate taxpayers still benefit from full upfront tax relief on pensions — so use it while it lasts, as a 30 per cent flat rate for all has been mooted as a way of treating lower earners more fairly.

Also, ask for a pay rise — and remember that anything less than inflation will have a knock-on effect on your pension contributions, including those from your own personal income and from the government and your employer.

High inflation means you can see the value of your cash savings erode, too — so make sure your deposits are working as hard as they can. Savings comparison website picks out the 18 Month Fixed Rate Deposit from Union Bank of India (UK) Ltd, paying 4.55 per cent, and the 120 Day Notice Account from Gatehouse Bank, paying 3 per cent. Another way to keep up with changing rates is to use a savings platform, such as Hargreaves Lansdown Active Savings.

But despite the challenging time for markets, a new poll by Interactive Investor has found more than two-thirds (67 per cent) of investors believe now is a good time to invest.

Hargreaves Lansdown says it has seen increased interest in resources and energy funds that benefit from rising commodity prices, and its top fund sector in the month prior to the Autumn Statement was North America.

Meanwhile, the FTSE 100 offers exposure to sectors that show resilience in tougher economic times, such as consumer staples, healthcare and utilities. Large UK companies in these industries look cheap compared with historic valuations and those in other developed markets. Many provide a high dividend yield, too.

In theory, some assets offer built-in inflation protection — for example, infrastructure, property, and index-linked bonds. However, the risk is that any benefits from their inflation-linked income are undermined by the “derating” of their prices caused by higher interest rates.

So, if you already have a well-structured investment portfolio diversified by sector, geography and asset classes, I’d ignore the market noise, keep calm and carry on.

Focus on what you can control, such as the cost of what you pay for investing. Moving to cheaper funds and lower cost investment platforms can significantly boost returns when savings are compounded over several decades. It could be your most powerful weapon in the fight against inflation.

But, if your investments do fall short, perhaps reconsider your plans to leave an inheritance. Many millennials would rather their parents focus on keeping cash reserves to fund a comfortable retirement and help with the cost of living, rather than passing too much down.

Or think about downsizing. Halifax says moving to a home one bedroom smaller would, on average, raise £120,820. That’s a useful safety net if future tax policies bring more pain for your finances.

Moira O’Neill is a freelance money and investment writer. Twitter: @MoiraONeill, Instagram @MoiraOnMoney, email: moira.o’

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