The post you are reporting:
Ok I have been absorbing the budget and am here going to privide some information how it is going to impact on people. What am not going to do is repeat information that you will have read in the newspapers but, as I said earlier, report the issues and factors that will be influencing my broader generic advice to clients. The information that will influence the direction of what I recommend to people.
This is not about the few pence on ciggies and booze, its not about the 50p tax rate either come to that or even the messing around with pensions tax relief or the increased ISA allowances.
What this is really about is the matter that will most significantly affect all of us for years ahead and no, that is not the recession as such, but something much more significant, longer lasting and economically debilitating.
I am referring to the proposed levels of Government debt which will impact on your financial circumstances in the years ahead. So what does it really mean.
There is absolutely no doubt in my mind that inflation is set to soar in 18 months to 2 years time. One forecast, pre-budget, estimated it will reach 8% within 3 years. After the budget that is now likely to be in double figures, to levels not seen since the 1970's. High levels of inflation will lead inevitably to high interest rates in an effort to combat it and reign in money supply.
For a lot of years now we have all got used to living in a low inflation environment and we will have to re-adjust to a high inflation environment for several yeasr at least.
Lets look at how it will hit you, your friends and family.
First - retired people:
Many people who have retired will be on largely fixed incomes. At retirement they will have obtained level annuities from their pension funds as they provided a significantly higher level of income, relative to inflation, in the early years of retirement while at their most active and in need of cash. Their income is going to be eroded much faster than in recent years.
Most people who arranged increasing annuities in retirement will have done so based on a 3% increase. These will also be eroded but at a slower rate than level annuities.
People drawing pensions from their former employer's Occupational Schemes will not be immune. In 2005 the minimum rate at which these pensions should increase was reduced. Before then it was based on the lower of inflation or 5% but in 2005 it was changed to the lower of inflation or 2.5%. Their income is therefore certainly going to be eroded against inflation. That would be true even at the older more generous rate. Do not count on schemes offering voluntary additional increases as they may well be struggling to keep afloat.
Those people who are drawing Public Sector Pensions do have full inflation proofing and so should manage better. One word of caution for them,the burden of these pensions is so huge on the exchequer they are not long term sustainable. I would not be surprised if they have their benefits reduced, at least for those who nare pre-retirement whether that will affect existing pensioners is another matter.
For Pensioners bank deposits the higher interest rates that will accompany higher inflation will seem to be a benefit to them. But, the value of their capital will be eroded by the inflation. Even with the interest rolled up and not taken as income they are still likely to find the value of their savings falling in real terms.
Inflation is not all bad news for Pensioners though. Inflation will push up their property prices so it may become more viable to release equity from their property to help them out. Other asset backed investments, such as shares, will also benefit and those people who have invested and make good use of asset backed investment to generate an income flow will also benefit. Their income streams (and capital) over time should at least keep pace with inflation.
Next - Those of you of working age.
You may have pensions with old company schemes as preserved benefits. Occupational schemes have their benefits re-valued at 5% or inflation if lower (the 2.5% figure does not apply to revaluation). These will therefore be reducing in real purchasing power as a result of higher inflation. One way out might be to consider transferring these schemes to investment led pensions. This is risky though and should be done lightly and only with specialist advise.
The same basic comments I made in respect of pensioners deposit savings and asset backed investments (except equity release) applies here too. Inflation does provide an opportunity for those able and willing to take advantage of it.
Higher inflation and higher interest rates means higher mortgage payments. In many cases it would be wise for people to repay as much debt as possible while the going is good. Those people at particular risk are those with interest only mortgages. The mortgage market is difficult at the moment with lenders having tightened their criteria. Where people can get a low fixed rate then might be a good idea but should make sure, if they can, that it is a long term fix. One or two years is no good, 5 years at least would be best, even if not the lowest rate.
Children
Deposit based Child Trust Funds will be at serious risk from the effect of high inflation while equity based CTFs should do much better.
This is a long post and I should leave it there and just sum up. We are in for a difficult period and while I sincerely hope I am wrong about what is going to happen to inflation, I am convinved I am right. A change of Government will not be able to change quickly enough the fundamental problem we are now faced with but, hopefully, with firm action might be able to alleviate and reduce the impact of what might otherwise happen. The worse thing that could happen is a return to 29% inflation (or more), as happened in 1977, but without drastic and immediate changes to economic policy I fear it could get that bad.
As I have touched on financial matters I must make a regulatory comment.
Please do not, whatever you do, make any investment decision of any kind based purely on what you have read here. You should take professional qualified advice first based on what is best for you personally after a detailed fact find and research.
