Lowes Magazine Issue 119

SAVING

Impact of inflation

INFLATION IS ONCE AGAIN ON THE RISE. THE UK inflation rate more than doubled in April with figures from the Office for National Statistics showing inflation jumped to 2.1% in May from 1.5% in April and then in June rose again to 2.5% and the Bank of England is not ruling out a rise to 3%. The concern for savers is that it continues on this trajectory as the UK emerges from lockdown and the economy opens up again. Rising prices for clothing, recreational goods and meals and drinks out were behind the increases, and as the UK eased lockdown restrictions and consumer spending increased, also the price of oil, as demand and travel have begun to pick up. The Bank of England has said that consumer price increases are a natural bounce back from the impact of the pandemic and that it will tolerate inflation rising modestly without effecting interest rate rises. In an inflationary environment the purchasing power of our money reduces which means our savings and investments have to work harder for what we have to spend to stay on a par with before (see table). Tax madness HM REVENUE & CUSTOMS FIGURES SHOW THAT pension savers overtaxed on pension withdrawals have had to reclaim £716 million since 2015. Figures show that the number of claims is a fraction of the number of withdrawals made (in 2020 a reported 38,000 official reclaim forms were processed by HMRC, while over 600,000 people flexibly accessed their retirement pot for the first time). This suggests many people are unaware they have been overtaxed or do not know the process to reclaim, which includes completing one of the three separate forms. Over-taxation occurs when a pension investor accesses their retirement pot flexibly for the first time in a tax year, prompting HMRC to apply an emergency ‘Month 1’ tax code to the withdrawal. The individual has the option to

Interest rates have been very low for so long now that an inflation bounce could have a serious effect on people’s finances. Therefore, it makes sense to factor the potential for higher rates of inflation into financial plans. This potential for higher inflation means keeping anything other than the necessary amount in cash, i.e. sufficient funds to cover a few month expenses, will only see its value diminish further. Investment portfolios with a long term bias that will ride out any fluctuations in inflation rates are now more important than ever.

Impact of inflation on our savings

Easy access cash saving - 0.5% interest rate

What £100 today is worth with Annual Inflation rate of 1% 2% 3% 4% 5% 98 93 88 84 80 95 86 78 71 65 93 80 69 60 52 91 74 61 50 42

Year 5 Year 10 Year 15 Year 20

Source: Aegon

either fill out a reclaim form or rely on HMRC to adjust their tax position. This situation has occurred since the pension freedoms were introduced – the tax system has failed to adapt to the new flexibility of the pension regime and to date HMRC are not considering a reform.

10 Lowes.co.uk