In April, the focus is often on optimizing Isa allocations.
But the upcoming increases in the energy price cap, national insurance contributions, dividend tax and an expected spike in inflation underscore the importance not only of taxation, but also of financial efficiency.
“When we do cash flow modeling, we assume that customer spending is growing at 2% per year,” says Louise Higham, director of financial planning at Tilney.
“Obviously right now inflation is higher than that and energy bills are going up quite significantly. So, especially for our customers, any increase above 2% has to be taken into account.”
A real danger is squeezing out what people consider non-essential, warns Mike Gummerson, director of business development at Unique Financial.
“For example, we are already seeing the cancellation of life cover. Advisors can help clients mitigate certain costs by ensuring, as always, that they make full use of all allowances and tax breaks.
Clients with larger assets are more likely to have more leeway to use tax allowances and reliefs.
“A typical wealthy person will have assets in different places,” says Ketan Patel, Certified Financial Planner at Kingswood.
“How they turn on the tap on different forms of income can always be flexible and change, and that’s how we would try to approach it.
“So, for example, if there is going to be a tax increase and the client has some of their assets exposed to that tax, they may get more out of another pot, so respond in result.”
Individual impacts of inflation
When looking at the CPI including Homeowners’ Shelter Costs (HOHC) for December, the largest upward contributions to the 12-month inflation rate come from housing, household services and transport.
“Inflation is a pretty broad measure,” says Nicholas Sinclair-Wilson, Certified Financial Planner at BRI Wealth Management.
“It captures a number of different things, from fuel prices to food prices. Depending on a customer’s circumstances and preferences, they might not be as impacted as the metric suggests.
“A simple example: one of the main drivers of inflation over the past 12 months has been the price of fuel and gasoline. But if you don’t drive, you probably won’t be impacted by the price at the pump. .
Jamie Smith, a partner at Foster Denovo, also says it’s important to educate clients about their inflation risk.
“There is always a danger that we assume that people understand what inflation really is and how it affects them.
“So we make them aware of how it might affect them in the short term, but really how it might affect their longer term planning, and generally we look at ways to mitigate that.”
Cash flow planning in the face of rising costs
The important thing to consider is the assumptions that drive cash flow planning, says William Stevens, financial planning manager at Killik & Co.