Inflation is good...the alternatives are not!

The UK has seen inflation rates gradually falling in recent times, with recent falls appearing to accelerate. There is no guarantee that this trend will continue, but with current inflation rates standing at 2.3% RPI (Retail Prices Index) and 1.2% CPI (Consumer Prices Index) in the year to September 2014 (source: Office for National Statistics), the possibility of stagflation, and even deflation, and their consequences, need to be revisited. 

As you will see, inflation, believe it or not, can have its benefits.

Stagflation

The term 'stagflation' refers to a combination of ‘stagnation’ and ‘inflation’. Stagflation is an economic phenomenon characterised by slow economic growth and rising prices. The term was first coined in the 1960s in the UK to describe the combination of a stagnant economy, increasing unemployment and rapidly rising inflation owing to dramatic upward movements in world oil prices. Stagflation hit the UK hard in the 1970s, as rising inflation and lack of employment opportunities stifled economic growth. 

There are a range of theories about why stagflation occurs. Keynesian economists cite supply shocks as the cause, for example rapidly rising oil or food costs. Others blame excessive growth in the supply of money – as Milton Friedman described, “too much money chasing too few goods”. It has also been argued that stagflation is just a natural part of the modern economic cycle or that political and social structures are responsible for the phenomenon.

Whatever the cause, stagflation raises serious dilemmas for economic policy because actions designed to reduce unemployment may exacerbate inflation, and vice versa.

Deflation

Deflation is the opposite of inflation - a general decline in the price of goods and services. It occurs when the inflation rate becomes negative, i.e. when the inflation rate falls below 0%. Deflation is often caused by a reduction in the money or credit supply, although it can also be caused by a decrease in spending by the state, the consumer or the financial community. Deflation increases the real value of money over time. This is because consumers will hold back on purchases of goods and services with the expectation that the price of these will fall over time. This fall in demand, combined with an increase in the real value of debt, leads to increased unemployment, which in turn can lead to economic depression, as seen in the US between 1930 and 1933 when the rate of deflation was rapid, banks failed and unemployment peaked at 25% of the population. 

Japan: 20 years of deflation

Japan has experienced deflation and its effects since the mid-1990s. The initial shock came in the early 1990s with the bursting of the economic ‘bubble’ of super-inflated property and stock market prices. The subsequent collapse lasted for more than a decade, as the slump in demand caused by the bursting of the asset bubble resulted in Japanese firms being unable to raise sales prices and cutting wages and employment as a consequence. From the late 1990s onwards, wages began to fall faster than prices and deflation became entrenched. With no incentive for firms to invest, the economy became trapped in deflation, with falling prices, falling wages and falling investment combining to maintain the downward pressure.

Is there a lesson here for Europe and the UK?

Firms in the Eurozone are responding to the lack of demand and their inability to impose price rises with a conviction that cutting labour costs is the route back to competitiveness. This is worryingly reminiscent of the vicious circle in which Japan became trapped in the 1990s and the threat of deflation is therefore of real concern to Eurozone leaders.

Summary

It will be interesting to see how the next few months pan out for the UK economy and the way that the Bank of England uses its financial tools to control, where possible, the outcomes. Inflation, against its alternatives noted above, can have its ‘benefits’. With many now suggesting that Bank Base Rates (currently 0.5% pa) will stay at this level until summer 2015, the effect of inflation or stagflation….or worse, could have a real effect on the value of the money we have to spend over time.

No individual pension/ financial advice is provided during the course of this blog.

If you would like guidance and advice on your income planning for the future then please contact the team at Chapters Financial at either our Guildford (01483 578800) or Woking (01483 330800) offices.

Keith Churchouse BA Hons FPFS
Director, Chapters Financial Limited
Chartered Financial Planner
Certified Financial Planner
ISO22222 Personal Financial Planner

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.

Where did 2013 go?

Our busiest months of the trading year are April/May and November. This has always been the case throughout my nearly 30 years in financial services. Many can understand the April/May date because of the end of the tax year (05^th April) and all this involves, including pension and ISA contributions. The November uplift is usually a surprise and this is because many finalise their financial planning at the end of the year before the festive season starts. Almost a final catch up before the year closes. From an economic viewpoint, it has been a significant year.

With the FTSE100 starting the year at 5,897 points (approx.), my open year prediction was that we would end the year with a starting digit of 7,XXX?. It looks like I might have to temper this prediction. (Past performance is not a guarantee of future performance). The FTSE100 is not an indicator of the health of the economy though and there are many other important and relevant economic factors to consider, examples of which might be: 

•  Foreign investment money stoking a possibly overheating London Property market is filtering through to the rest of the UK.
• The Government’s funding initiative of the 'HomeBuy' scheme, generating greater flexibility for usually First Time Buyers (FTB) to enter the property market. With recent reports that the average FTB was entering the property market in their 30's, action had to be taken.
• Cash deposit yields falling ever further with now confirmed low rates (through ‘Forward Guidance’) from the dynamic Canadian Banker that heads the Bank of England (BoE). Bank Base Rate has remained at 0.5% pa throughout the year to date. 
• Some banks and lenders being more approachable for SME/ Small Business finance.
• Growing Building/ construction starts ups helping with the stubbornly high unemployment data (October 2013 2.47M), which is starting to show falls (possibly quicker than Mr Carney thought).
• Largest number of Initial Public Offerings (IPO’s) since the start of the recession on London.
• Inflation (Consumer Prices Index/CPI) remaining above the current BoE target of 2.00% pa, at 2.20% (October 2013)   

Be under no illusion, our economic market has changed and I believe is in the final throws of shaking off the shackles of recession. This is a changed beast and is going to move forward, I think quicker than many of us expect. As you have seen in our previous November Blog, we have also seen the implementation of the Retail Distribution Review (RDR) in 2013 which, for some, has been a welcome change to the delivery of financial advice to the public in the UK. 

I hope, like Chapters Financial Limited, that you found 2013 a positive year for your financial planning. The flow of economics points to 2014 being a positive year, although I am sure there will be volatility along the way, and a positive outcome is not guaranteed. However, taking high quality financial planning advice throughout the year is worthwhile to ensure that you make the best of the economic climate, whatever it transpires to be. 

If you would like to receive further information with regards to your own individual situation and circumstances, then please contact the team, either in Guildford or Woking.

Keith Churchouse FPFS
Director
ISO22222 Personal Financial Planner
Chartered Financial Planner

Larger Pension Contributions/ Pension Input Periods (PIPs)

Many clients and enquirers are aware that the tax year 2013/2014 has seen changes to the tax regime being applied to their income and allowances. A good example of this is the fall in the highest tax charge rate of 50% to a new lower level of 45%. More changes to the tax regime are due in the tax year 2014/2015 and one of these points, namely the Pension Input Period, or PIP for short may affect your pension planning in this tax year (2013/2014).

The Annual Allowance (the amount you can put into your pension without a penal tax charge being applied) is dropping to £40,000 in the 2014/2015 tax year from £50,000. It is important that you know the Pension Input Period (PIP) end dates for each of your pension plans to ensure that you do not exceed the limits, attracting a tax charge at your highest marginal income tax rate accordingly.

If the PIP end date for your pension falls in the new tax year 2014/2015, then any contributions will be tested against the reduced Annual Allowance of £40,000, rather than the current Annual Allowance of £50,000.

Remember that not all plans will have the same PIP dates and this should be checked on each plan that you hold.

It is also worth noting that Defined Benefit schemes (such as a Final Salary scheme) are valued using a factor of 16, plus lump sum where applicable, over the Consumer Prices Index (CPI). Therefore any increase in benefits increasing by approximately £2,500 for the year over CPI will breach the new reduced £40,000 Annual Allowance (2014/2015).  

If you would like to know more about this pension planning and your tax allowances then please contact the team at Chapters Financial Limited on 01483 578800.

No individual advice has been provided in the text of this blog. You should seek independent financial advice (IFA) in your own circumstances.

Keith G. Churchouse FPFS

ISO22222 Certified Financial Planner

Director and Financial Planner

The State Pension......and the possible changes ahead?

This week we have seen our coalition Government turn their attention to the State Pension and the way the current benefits are provided. I am sure there will much press coverage, comment and concern about future changes, both for those who may be effected in the shorter term, from 2017, and for those who hope to claim this benefit into the longer term.

I wanted to provide a summary, and for the purposes of this Blog, I have divided this into the following sections:

The Past and Present

Currently, the basic State Pension amounts to £107.45 per week. This income is paid gross, but is taxable and increases with the Consumer Prices Index (CPI) with a minimum guarantee of 2.5% if CPI falls below this rate, which it did in 2012. On top of this, you might also receive additional State Pension income from past accrual of the State Earnings Related Pension (sometimes known as SERPS) or its successor, the Second State Pension (S2P). I have seen this additional pension benefit when added see the overall pension paid double on regular occasions.

My current understanding is that those who have State Pension benefit in payment before 2017 will not be affected by the possible proposals.

You can probably tell that this can be a complicated calculation when taking into account all the varying factors, with a maximum accrual achieved over 30 years (proposed to increase to 35 years). Here lies part of the perceived problem and the target to simplify the process. It is also proposed that no State Pension will be achieved, with a proposed minimum of 10 years National Insurance accrual to qualify for any State Pension.

How do I check my current State Pension benefit?

You can check your current accrual of your State Pension by completing a BR19 State Pension Forecast Form (available here).

State Pension Deferral

It is currently possible to defer the State Pension after your normal State Pension age (which we know as been increasing over recent times and still increasing), seeing the benefit deferred increasing by 1.0% for every 5 week period. This increase amounts to 10.4% over a full year and this option can be beneficial in financial planning for those who, as an example, continue to work and have no immediate need for the income.

For information, this increase can be taken as taxable cash or increased taxable income. It will be interesting to see if this option survives the final ruling on future changes.

The Future?

The new proposals put forward for 2017 suggests a flat rate of State Pension of around £155.00 per week in total (about £144.00 per week in today’s terms). Of course, this figure may change when everything is finalised. Past SERPS and S2P accrual (which might have given a higher income if the rules had not changed) will be gone.

Of course and as usual, there are winners and losers by changes in legislation. Winners are likely to lower earners and some have indicated females who opted out of the State Pension many years ago. Losers are likely to be higher earners or medium earners who did not contract-out of SERP's (option started in 1988 and stopped around 2 years ago).

Summary

It is suggested that the other 'winner' in these proposals will be the Government, with an overall reduction in long term costs. We are all living longer and, understandably, this places greater burden on the pension system, whether that be the State system or private sector schemes. Clearly, planning for your future retirement will become ever more important to secure future benefits.

No individual advice has been provided during the course of this blog. Pension and retirement planning should be planned for carefully and if you would like to receive individual advice on this subject, then please contact the team at Chapters Financial Limited on 01483 578800

Keith G Churchouse FPFS
Director, ISO22222 Certified Financial Planner
Chapters Financial Limited, Guildford, Surrey
Chapters Financial Limited is authorised and regulated by the Financial Services Authority, number 402899.

The Queens Jubilees/ An economic comparison

First of all, may I wish Her Majesty the Queen many congratulations on her Diamond Jubilee of her ascension to the throne in 1952. I am one of many who admire her courage and energy in fulfilling her many duties and we are honoured to have her as our Queen.

The preparations for the Diamond Jubilee across the UK are gaining pace with Bunting, flags and homemade crown posters appearing in many villages and street corners. It certainly brightens many communities at a time of austerity and with many families, companies and individuals working hard to make ends meet.

It makes me feel rather nostalgic, as I reminisce about what for me was the last big Jubilee of 1977. To age me, I was 10 at the time and the prospect of a street party was very exciting indeed. With Union Jack hat made, I remember (in true British style) that it poured with rain that afternoon and we moved the party indoors. It did not dampen any spirits and much merriment was had by all. The children filled to the brim with tartrazine (a now well-known orange squash colour additive of the time), they played for hours. All great fun!

Obviously, at the age of 10, it was not my time to understand the detail of what was happening to the economy at that time and have referred back to the history books to investigate this further. We all know that the past is not a guide to the future, however, it nevertheless offers some interesting insight into the time then, and possibly a few comparable’s with what is happening now.

From an economic point of view, the 70's were in general a difficult economic period. With the price of oil reaching (at the time) a peak in 1973, Industrial disruptions and high unemployment to name but a few issues, the background to Her Majesty's Silver Jubilee was not that pretty. Sound familiar? As other points of reference, Labour was in power (with James Callaghan), Jimmy Carter became the 39th President of the United States of America in January, Punks and the Sex Pistols were rebelling at every opportunity and we endured the 'long hot summer of '76' the year before. We had only been in the European Economic Community (as it was known then/Now European Union) at that time in 1973 (Joining in 1973 with the agreement signed by Edward Heath).

But what was happening in the economy in June 1977? I have detailed some of the economic headlines/indices below:

• (RPI) Inflation Rate: 17.7%
• Bank Base Rate (04th May 1977): 8.50%
• UK Unemployment Level: 5.6%
• Dow Jones Index (01 June): Open 898.66,
• Litre of Petrol: 18p a litre (as was Diesel!)
• Gold Price 08/06/1977 per ounce: $142.30
• Average House Price 1977: £13,600
• Price of a Pint of Lager Beer (Probably from a Party 7 tin if you remember those!): 20p
• Price of a loaf of bread: 9p

Sources: Wikipedia, Yahoo, Guardian, AOL, Others

I am sure that these facts and figures will make interesting reading. It is ironic that the gathering of this information was achieved via the internet at the touch of some buttons. You could not have done that in 1977!

And what of the future? Many pundits have suggested that we live in unchartered waters, and I am sure that this will prove (in many quarters) to be true. What we can be certain of is that change will occur, both in personal circumstances/life phases and the economic environment which we live, work and retire in. Seeking independent financial advice on (and reviewing) your financial planning on a regular basis is important in ensuring that you get the best from your finances as times change.

I hope you enjoy the long weekend of the Diamond Jubilee and if you are looking at your financial situation over the summer, then come and speak to Chapters Financial Limited and see how we can help you with your future planning.

Past performance is not a guide to future performance and no individual financial advice has been provided in the content of this blog.

Keith G Churchouse, Chartered Financial Planner
Director, Chapters Financial Limited

Chapters Financial Limited is Authorised and Regulated by the Financial Services Authority. Number 402899