Topic: News

Cost of Living Rises as Prices Surge – 22nd November 2021

Article written by Andrew, Charles, Chris, Mark and Will, Portfolio Management Team at Square Mile.

Last week saw UK inflation surging to its highest level for a decade, hitting 4.2% in October. This was both higher than the markets expected and more than twice the Bank of England’s (the Bank) target of 2%.

It looks as if soaring energy and fuel prices are pushing up the cost of living, and families were warned of a “painful’ rise in the cost of living this winter. The figures also showed sharp rises in inflation across food, hospitality, and household goods as supply chain disruption took its toll.

The figures have surprised some market commentators after the Bank of England’s decision earlier this month to maintain interest rates at record levels of 0.1%. The Bank, however, needs to be seen to be doing something, as there is a danger that inflation is rising so rapidly that it risks becoming embedded. There is also the issue of the Bank’s credibility after the decision to leave interest rates untouched, which wrongfooted the market and led to some questioning their credibility. Although their reasoning for not raising interest rates to date has been due to the labour markets, it is evident after the employment figures, that this is no longer in question.

With the sharp fall in unemployment and record levels of vacancies, it is now believed that an interest rate rise next month to curb prices is almost inevitable. The Bank has also recently warned that the Consumer Prices Index (CPI) will reach 4.5% towards the end of this year, and around 5% in April 2022. The headlines reflect the fact that these price increases are happening at a time when pay growth is slowing to 3.4% in September, and families are facing the prospect of falling real incomes over the coming months. The city now expects a hike in interest rates and is assuming they will rise by 0.15%, to a headline of 0.25%. This increase, however, will not make much of a difference as inflation is being driven by rising petrol, gas, and electricity bills, and these prices are not affected by UK interest rates.

Whilst raising interest rates may not stop soaring inflation, it could at least begin to slow it. It takes about six months for any interest rate rise to start to take effect, so we should not expect much evidence of change for some time to come. Future interest rates are not expected to rise much above 1%, and the impact of higher rates will be felt by household borrowers, but also by a heavily indebted government that has borrowed record levels of money to keep the UK economy afloat through the COVID crisis.

The Bank must grasp whether this inflation is short-term, driven by short-term supply chain squeezes, or longer-term and therefore more aggressive hikes in interest rates will be needed. We should get a clearer picture in the next few months. In the meantime, we will ensure we retain a flexible approach in your portfolios to ensure we can deliver irrespective of what the markets might throw at us.

 

This document shall not constitute or be deemed to constitute an invitation or inducement to any person to engage in investment activity and is not a recommendation to buy or sell any funds of individual stocks that are mentioned in this document. Past performance is not a guide to future returns and the value of capital invested and any income generated from it may fluctuate in value.

 

The Close Call

It seems like we have been talking about an increase in interest rates for some time now. Although we seem to have had a ‘close call’ today with the Monetary Policy Committee voting 7:2 in favour of holding rates at the historic low of 0.1%, they did comment that interest rates could rise “from now onwards”.

I think we have reached the point of ‘when’ and not ‘if’ interest rates will rise and it seems it will only be a matter of weeks.

This may come as a relief to savers, who will be pleased to see the meagre rates paid on savings increase, even if only slightly.

Borrowers on the other hand beware. The cost of borrowing will most likely climb faster than the ‘official’ Bank of England Base Rate as lenders try to price in future interest rate increases as well.

With this said, the Bank does not expect rates to be above 1% by the end of 2022 – still ridiculously low by historical standards. If you had offered a mortgage borrower a sub 1% rate back in 2006, I am sure they would have taken your right hand off!

So, what financial planning actions can we take now to prepare for the seemingly now inevitable rate rise?

First off, for savers, you may wish to avoid locking into any long-term products or bonds. It seems very likely that the rates available on these longer term savings products will go up in the coming months in line with interest rates, so it may be sensible to park some cash in an easy access account for a few months and see what deals come along in the new year.

Borrowers on the other hand should consider the opposite actions – think about locking in for as low and as long as you can. It may even be worth paying an early repayment charge on an existing mortgage to access a new, lower, fixed-rate deal, but of course this will require careful consideration. We have been saying it for years, but I think we may now look back and see this current era as the lowest mortgage interest rates have ever been and ever will be.

As always, if you need any assistance with your own financial planning, please don’t hesitate to contact a member of the Buckingham Gate team.

Monthly Vlog – October 2021

In this month’s Vlog, Matthew provides updates on the market and the performance of the Buckingham Gate Portfolios. Matthew speaks more about so-called ‘transitory’ inflation and explains how we are going to approach registering our clients’ trusts. Matthew tells of the outcomes (or lack of) from the 2021 Budget announcement and lastly explains that we will be bringing you some more advanced financial planning ideas in future vlogs.

Care Fees Update, National Insurance & Dividend Tax & Budget Date

Care Fees Update

We have this week finally seen the much-hyped changes to care fees announced.

This is an issue that has been ignored and deferred by successive governments. There have been countless consultations and suggestions over the years, but none of them have really moved far off the starting line. But now we have a new care fees system.

I think most people will now be aware of the key points which are as follows:
The ‘full fees capital means test’ limit will be increased to £100,000. This means that if you have over £100,000 of capital assets (including the family home, unless it continues to be occupied by a partner, relative or dependent aged over 60), you will be responsible for your care fees in full.

There will also continue to be a lower limit of £20,000 below which assets will not be taken to fund care fees.

For those with assets between £20,000 and £100,000, there will be a partial contribution required towards care fees, with this increasing the closer you are to the £100,000 asset limit.

In addition to the above, there will remain a (very significant, but far less publicised) income based means test that says that if you have sufficient income to pay your own care fees (regardless of capital), then a contribution could still be required.

All of the above will be subject to a cap on what an individual will be expected to contribute to their care fees. The cap will initially be set at £86,000. Beyond this point, no individual will have to pay towards their care costs.

So far so good, however, as usual, we have been looking beyond the headlines to try and find some of the devil in the detail.

The most significant point not really being covered in the mainstream media is that the whole set of rules above only apply to your personal care costs, not your ‘hotel’ costs (‘hotel’ costs being the cost of staying in accommodation, food, utilities etc).

As such, the amount an individual could pay in their lifetime for how they would view their ‘care fees’ could well be much greater than the £86,000 cap when you factor in the ‘hotel costs’.

Now, to be clear, this has always been the case. Hotel costs have always been assessed separately from actual personal care fees, but people often don’t appreciate that there is this distinction.

As such, the new proposals are a welcome addition to the care fees system and at least provide some degree of certainty.

What is perhaps more interesting is that these proposals could well pave the way for insurers to re-enter the long-term care market and produce the first real insurance products for long-term care in several decades.

We will continue to monitor developments and will of course report on anything significant that becomes apparent in the months ahead.

National Insurance & Dividend Tax

In order to pay for the above, the government has introduced an additional 1.25% levy to be added to national insurance as an interim measure and then split out as essentially a third kind of tax on employment income.

Moving forward, you should see your income tax, national insurance and a ‘health and care premium’ on your payslips.

In addition, the dividend tax rates have also had 1.25% added, meaning the basic rate of dividend tax will rise from 7.5% to 8.75%. Dividends will still represent a tax efficient income source for most people, although of course these changes make them slightly less attractive.

What they also do is increase the relative attractiveness of capital gains as a form of ‘income’, especially when levied on shares and bonds, as this is charged at a basic rate of 10% and a maximum rate of 20%, even for higher rate taxpayers.

Budget Date

Finally, we do now also have a confirmed budget date of 27th October 2021. This budget will be particularly telling as the UK continues to recover from the Covid pandemic.

We will of course continue to monitor any proposed tax changes and will report to clients anything that might be relevant to their financial planning.

Into The Unknown

As I have returned from holiday, it has become increasingly clear to me just how divided people are in terms of their feelings around the ongoing Covid-19 pandemic.

On the one hand, some clients are effectively ‘back to normal’, having been making the most of our newfound freedoms by eating out, attending shows and enjoying international travel for example.

On the other hand, there are some who are still very worried about the virus, perhaps informed by their own experiences or those of a close friend or family member.

Nowhere was this more apparent than in the survey we ran recently to ask whether clients wanted us to hold our annual client event in person this year at the RAF club, or online as we did through necessity back in 2020.

We ran the survey hoping to gain some clarity and guidance on what our client base wanted. The result – almost a dead heat. A 50/50 split right down the middle.

We appreciate each and every one of our clients and respect the differing views around this highly sensitive topic, so we have decided to try and deliver the best of both worlds.

For those that would like to join us in London for the usual evening of wine, canapés, conversation (and a little presentation from yours truly), then you are very welcome to do so.

For those of you who would rather not make the journey (due to the Covid risk or otherwise) we will be live-streaming the event so that you can enjoy it from the comfort of your own home.

What does seem clear, is that any notion that we were going to get back to ‘normal’, is clearly out of the window. Of course we will find a ‘new normal’ over time, but unlike with lockdown, there won’t be an announcement or a government briefing. There won’t be a BBC news report announcing that we have arrived at this ‘new normal’.

Instead, we will most likely experience very gradual change over the coming months, until, one day, we wake up and realise that things have settled. Things have stopped changing.

I want you to know that whatever happens, we are here for you, our valued clients, whenever you need us, in person, on Zoom or on the phone. We will continue to adapt and innovate in this brave new world.

Here we go … into the unknown!

Monthly Vlog – July 2021

*July’s Vlog*

In this month’s Vlog, as usual, Matthew provides updates on the market and the performance of the Buckingham Gate Portfolios. Matthew also speaks about how US technology companies continue to dominate the markets. He asks for your thoughts on your preferred format for the Buckingham Gate Client Event this year, and lastly Matthew discusses the potential Budget push-back speculation. We hope you enjoy!

Monthly Vlog – June 2021

*June’s Vlog*

In this month’s Vlog, as usual Director Matthew Smith provides updates on the market and the performance of the Buckingham Gate Portfolios. Matthew also explains some changes that have been made to the Buckingham Gate Portfolios recently and lastly he addresses the speculation in the news surrounding pension tax relief potentially being reduced. We hope you enjoy!