All of your financial decisions and activities have an effect on your financial health. To help improve your financial health during this period of rising inflation and interest rates, we look at three areas that could help keep you on track to achieving your specific financial goals.

BEAT THE NATIONAL INSURANCE RISE

The National Insurance rise from April this year is going ahead for workers and employers. This is despite pressure to reverse the decision to increase this by 1.25%, which is aimed at raising £39 billion for the Treasury. From April 2023, it is set to revert back to its current rate. A 1.25% health and social care levy will also be applied to raise funds for further improvements to care services.

One way to beat the National Insurance increase is by taking advantage of salary sacrifice. Which means you and your employer pay less National Insurance contributions. Some employers may decide to maximise the amount of pension contributions by adding the savings they make in lower employer National Insurance contributions (NICs) to the total pension contribution amount they pay.

This is also a way to make your pension savings more tax-efficient. If you choose to take up a salary sacrifice scheme option, you and your employer will agree to reduce your salary. Your employer will then pay the difference into your pension, along with their contributions to the scheme.

As you’re effectively earning a lower salary, both you and your employer pay lower NICs. Which could mean your take-home pay will be higher. Better still, your employer might pay part or all of their NICs saving into your pension too (although they don’t have to do this). However, salary sacrifice may not be suitable for all employees. You must not reduce employee’s earnings below the national minimum wage (NMW) or national living wage (NLW) rates.

REVIEW YOUR SAVINGS ACCOUNTS AND RATES

Money held in savings accounts hasn’t grown much in recent years due to historically low interest rates. But with inflation running higher, your savings are now at risk of losing value in ‘real’ terms. You’ll be able to buy less with your money.

In some respects, inflation can be seen as a positive. It’s a sign of strong economic recovery post-COVID, increasing salaries and higher consumer spending. But it’s bad news for your cash savings. Relying solely or overly on cash might prevent you from achieving your long-term financial goals. Which may only be possible if you accept some level of investment risk.

In an environment where the cost of living is rising faster than the interest rates received on cash, there is a danger that your savings will slowly become worth less and less, leaving you in a worse position later on.

If you have money in savings, it is important to keep an eye on interest rates and where your money is saved. Rates are low and you will lose money in real terms if inflation is higher than the interest rate offered on your savings account or Cash Individual Savings Account (ISA).

CONSIDER SHIFTING LONGER-TERM SAVINGS INTO EQUITIES

During times of high inflation, it’s important to keep your goals in mind. For example, if your investment goals are short term, you may not need to worry much about how inflation is impacting your money. But if you’re investing for the long term, inflation can have a larger impact on your portfolio if it’s sustained. Although high inflation that only lasts for a short period may end up just being a blip on your investment journey.

If you have large amounts of money sitting in cash accounts one way to beat inflation is to invest some of your money. Invest it into a long-term asset that will appreciate with time. Thus increasing your buying power over time. There are many ways to invest your money. But, most strategies revolve around one of two categories: growth investments and income investments.

Historically, equities have offered an effective way to outperform inflation. Cyclical stocks – like financials, energy and resources companies – are especially well-suited to benefit from rising prices. These sectors typically perform better when the economy is doing well, or recovering from a crisis.

Depositing funds into your investment portfolio on a regular basis (such as monthly from salary) can help you invest at different prices. Averaging out the overall price at which you get into the market. Known as pound-cost averaging, this can help you smooth out any fluctuations caused by market volatility over the long term. While volatility will always exist, it can be managed and reduced by taking this approach. No matter how long money stays invested, there are no guarantees an investor will get back the amount they first put in. As markets are unpredictable and can go up and down.

LET US HELP CHART YOUR PATH THROUGH LIFE

The most effective way to make the most of your money is by receiving professional financial advice. We can help you chart your path through life, ensuring you are financially ready for every stage.

For more information or to discuss any of the issues raised in this article, please contact us. Further information can also be found at gov.uk.

Personal circumstances differ and not all of this information is applicable to every client and/or their business, this information is general in nature and should not be relied upon without seeking specific professional financial advice.

The financial conduct authority does not regulate tax advice, estate planning or will writing.

The content in this article is for your general information and use only and is not intended to address your particular requirements. Articles should not be relied upon in their entirety and shall not be deemed to be, or constitute, advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles.

Thresholds, percentage rates and tax legislation may change in subsequent finance acts. Levels and bases of, and reliefs from, taxation are subject to change and their value depends on the individual circumstances of the investor. The value of your investments can go down as well as up and you may get back less than you invested. Past performance is not a reliable indicator of future results.

Pareto Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority.