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01 Nov 2024
Listening to the Labour party's Autumn Budget, which I thought was delivered with a commendable blend of conviction and ambition, I was struck by one over-riding thought. This is a Budget for inflation.
Among several inflationary measures in the Budget, I pick out these three to shine a torch on:
For those aged 21 or over the national living wage goes up by 6.7%. And for 18- to 20-year-olds who are on the national minimum wage they get a massive 16.3% pay rise. A stark fact of life is that people on very low earnings tend to spend almost every penny they get in wages. So, this extra money may well go straight into the shops, fueling upwards price rises. Of course, not all will behave in this way.
Most of the Budget headlines featured the new rates, with employers set to pay NI contributions at 15% of our earnings rather than the 13.8% previously. Less prominence was given to the threshold at which employers start to pay NI contributions, which has shrunk from £9,100 per year currently to a lowly £5,000 per year. Proportionately the extra burden for employers is very high for low paid and part-time staff. Many of these are in the retail and catering sectors where currently margins are thin and profitability low. These employers have no scope to absorb the extra NI and will pass it onto consumers as price rises.
The big change for pensions was to bring left over pension pots on death into scope for Inheritance Tax. This will encourage some retirees to spend their pension rather than holding it back as a bequest for sons and daughters. Again, more money into the shops fueling inflation. In the savings space we saw another attack on Buy to Let investors – round where I live a two-bed flat suitable for renting out costs around £400,000 and will now come with a stamp duty tag of £27,500. Investors who might have otherwise purchased a property to rent out will now be more likely to save in banks and ISAs. Savings that would have been locked up will now be highly liquid and likely to be nibbled into for spending, with concomitant upward pressure on prices.
The Office for Budget Responsibility seems to agree and predicts that the Budget measures will add 1.1% to inflation next year.
The key question for pension savers will be “is your Sipp or SSAS adequately protected against inflation?”
One guaranteed way to protect against inflation is to buy Index-Linked Gilts. There are a range of maturity dates available so pick one close to the date you expect to access your pension pot. Alternatively, Index-Linked Gilts can be held inside a unitised fund or an ETF structure, which may allow the fund’s manager to select a range of different coupons and dates, taking advantage of any temporary market mis-pricing which they will find evident in what is a pretty thin market. Funds and ETFs are easy to hold in a Sipp or ISA. But if the investment is outside of a tax wrapper, then remember that direct holdings of Index-Linked Gilts are exempt from Capital Gains Tax, so immune to the higher rates of CGT we saw in the Budget.
How much inflation protection to buy will depend upon individual needs and circumstances, but a useful rule of thumb is that between 10% and 20% of a pension pot should be inflation-protected by being held in Index-Linked Gilts and other assets with performance strongly correlated to inflation. Percentage-wise probably an allocation somewhere in the teens will be about right, hence my question: “is your pension inflation-teen-proofed?”
There will be plenty of clients wondering about what the Budget announcements mean for them, meaning that there are lots of opportunities for advisers to demonstrate the value they provide.
Adrian Boulding
Director of Retirement Strategy at Dunstan Thomas
023 9282 2254
enquiries@dthomas.co.uk
