It’s odd how we quickly get used to accepting what is really quite unusual as ‘normal’. Inflation is running at 3.3% but bank base rate is 0.5%. In normal times interest rates would have to rise to give a return above inflation. So whilst there might be a benefit for those with a mortgage, anyone with money to invest could be forgiven for scratching their head.
Government debt continues to rise, from 1992 when the national debt was £0.2 trillion to £1.6 trillion now and printing money seems to fund the incessant increase in borrowing each year.
The economic way to sort the problem out would be to increase interest rates to give a real return above inflation, to reduce government spending and to raise taxes. But printing money has been around for 5 years and although it seems this can’t last much longer interest rates and taxation do not seem to be rising that much. So, we can’t expect much help from the Government so maybe it’s time to take advantage of the opportunities that are available.
The reaction by some investors, to what are effectively negative interest rates, has been to invest in asset classes that do provide a positive return. Hence the stock market is reaching all-time highs as I write, as investors keep buying equities.
Now is a very good time to invest in pensions; that is before the limits on the amount you can put in to your pension each year reduce further or the tax breaks become less generous. The annual amount that can be paid into pensions has already been reduced from £255,000 per annum to £40,000 per annum next year. As pension contributions are 100% tax exempt on payments in, the tax relief (for a 45% tax payer) provides an 81% return on your pension investment. This return is effectively guaranteed as it is paid by HMRC. There has long been talk of capping the amount of tax free cash available. Hence my call to invest in pensions now before new contributions are capped.
Likewise there is talk of capping the lifetime maximum amount that can be held in ISA’s to £100,000. Whilst an ISA is not as tax efficient as a pension because the investment is paid out of income that has already been taxed; there is no further tax to pay on the growth of the investment.
If you’re worried about the value of your savings and investments being eroded by the current market conditions or want to look at a more tax efficient approach I’d be happy to help.
Chartered Financial Planner, Birmingham