2021 ended with inflation sitting at 5.4%, but it may not have felt like that to you. 

You may have caught the food campaigner Jack Monroe on TV and radio interviews recently highlighting how the uneven effects of inflation on the most basic foodstuffs can have a disproportionate effect on lower income groups. Her intervention has prompted the ONS to look beyond the average in more detail at ‘individual inflation rates’.

Annual CPI inflation in the UK for 2021 was 5.4%, a sharp increase from a year earlier, when it was just 0.6%. The jump, which took the inflation measure to its highest level in almost 30 years, was by no means unique to the UK. Across 2021, in the US, inflation rose from 1.4% to 7.0% while in the Eurozone the change was from –0.3% to +5.0%.

Sectors

Whether inflation felt like 5.4% to you is another matter. The hierarchy chart above shows how the dozen price categories that make up the CPI contributed to that headline inflation figure. The standout sector, accounting for nearly a third of overall inflation, was transport. Drill down into that and you will find three sub-sectors with annual inflation exceeding 25%: fuel and lubricants; second-hand cars and air flights. If you did not buy a second-hand car and did not fly in 2021 – as many people did not – then two of those three passed you by.

The second largest inflation driver was what might be described as the home sector – housing, water, electricity, gas and other fuels. It was those last three that were the main problem, with household fuel bills rising by 22.7%. If you were lucky enough to have a fixed-term contract for your utilities – and your supplier survived 2021 – then again, the change recorded by the CPI statisticians would have been irrelevant to you. On the other hand, if your bargain fixed-term deal (or its supplier) ended in 2021, then your utility bills might have risen much more than implied by the CPI.

Each to their own

The lesson to learn from all this data is that inflation as measured by the CPI is unlikely to be the inflation that you experience. Your mix of spending probably does not match the CPI ‘shopping basket’ and will change over your lifetime. For example, in retirement, expenditure on commuting will generally disappear but outlays on recreation activities may well increase.

Your financial planning should always take account of inflation. The unexpected jump in 2021 could mean that it needs to be reviewed – either based on the CPI or your personal circumstances.

Source: Office for National Statistics.

One side effect of the pandemic has been a surge in scams, with around £535 million reported as lost to investment fraud in the year to April 2021. One investment scam involving a retired detective shows just how sophisticated they can be.

Cloning fraud

A retired detective was pursuing a recommendation to invest in Vanguard, but when she attempted to find out more about the opportunity a Google search led to a cloned website. Further checks showed Vanguard’s logo, address and company number all matched, and the paperwork provided was convincing. The investor even had to comply with money laundering requirements.

Unlike many scams, the funds did not immediately vanish; the investment was available online for a few days. Encouraged by this, along with assurances regarding financial protection, the investor transferred a further substantial sum. It was only at this point that the scam became apparent, because this amount failed to appear on the online account. A call to Vanguard’s customer service confirmed the worst.

Contingent reimbursement model (CRM)

Most major banks are signed up to the CRM. They promise to refund scammed customers provided they were not unduly negligent. The idea is that the financial sector should be familiar with scams and how they operate, whereas the public generally is not.

The detective’s bank initially refused to refund the full investment, but ultimately relented. There are some scams so convincing that even an experienced customer cannot spot them.

Prevention

No website, text, phone call or product should be taken at face value, however credible. The FCA maintains a warning list, and this should always be consulted. It is not a quick check because a search can give several results, but what is very useful is that the correct contact details are provided for the genuine firm.

The payee’s bank details should be carefully checked since they obviously cannot match exactly those of the genuine firm. And of course, banks and other genuine financial institutions will not ask for your financial details over unsolicited phone calls, text messages or emails.

The FCA’s warning list also provides useful advice on how to avoid financial scams in general.

Photo by Jefferson Santos on Unsplash

A recent survey of people who have retired or plan to retire in 2021 provides interesting insights, whatever your intended retirement year.

The average age of people planning to retire in 2021 is 60, according to a recently published survey by investment manager, Standard Life Aberdeen. That is six years before current state pension age, which will rise from 66 to 67 between 2026 and 2028. Those 2021 retirees will, on average, live for another 25 years if they are men, and 28 if they are women, according to the Office for National Statistics (ONS). A quarter will survive to age 92 and 94, respectively, implying over a third of their life is spent in retirement.

The Class of 2021 report found that 37% of respondents had brought forward their retirement date because of the Covid-19 pandemic – a reminder of the importance of building flexibility into your retirement planning. Perhaps the acceleration of plans also explains why only about two in five felt very confident they were financially ready to finish working this year. The lack of financial confidence also showed up in other responses:

• Nearly half intended to cut their spending in an effort to support their retirement.
• Just over a quarter said they would work part-time for the same reason.
• One in five planned to sell their property or downsize to meet their retirement costs.

Those costs may have been underestimated, as the average planned retiree’s household spending was £21,000 a year, almost a third less than the average 2020 household income, according to the ONS.

The most concerning statistic was not one directly supplied by the retirees, but the result of an assessment by the survey’s sponsor, the Pensions and Lifetime Savings Association.  They calculated that even using the £21,000 annual spending target and allowing for the eventual arrival of the state pension, two thirds of the 2021 retirees were at risk of running out of money. The association’s estimate was that a savings pot of £390,000 was needed to cover 30 years of retirement expenditure.

All food for thought, whatever your planned year of retirement…

Photo by Marc Najera on Unsplash

HMRC is allowing your second self-assessment payment due on 31 July 2020 on account for the tax year 2019/20 to be deferred, due to the Covid-19 pandemic.

This means no interest or penalties will be charged on the deferred payment provided it is paid by 31 January 2021. All taxpayers within self-assessment can take advantage of the deferral option, not just those who are self-employed. There is no need to tell HMRC that the payment on account is being deferred.

Paying the deferred amount

Although you can still make the payment by 31 July 2020 as normal if you’re able to do so, deferral will be attractive if cash flow is a concern. The deferred amount can then be paid between 31 July 2020 and 31 January 2021:

• in full using normal payment methods, or
• in instalments by setting up a budget payment plan with HMRC.

Snowball effect

Although you do not need to pay the deferred payment until 31 January 2021, there is likely to be a snowball effect if it is not paid off by then. This is because that is also the deadline for paying any balancing amount for 2019/20, plus the first payment on account for 2020/21. If you make your accounts up to 31 March or 5 April, then these amounts will be based on profits for the year ended 31 March/5 April 2020, so mainly pre-COVID-19.

Photo by Leon Dewiwje on Unsplash

Even though payments on account for 2020/21 can be reduced to an estimate of the tax and NICs that will actually be due for this year, these might not be as low as you expect once council COVID-19 grants and amounts received under the self-employment income support scheme are included.

As things currently stand, HMRC will apply the usual interest, penalties and debt collection procedures for payments missed from 31 January 2021 onwards.

Reductions to income caused by Covid-19 could affect your tax bill in other ways:

• It may now make sense to restart child benefit payments because your drop in income means they will not be taxed away to zero.
• You may have regained some or all of your personal allowance for 2020/21.
• You might become eligible for a higher personal savings allowance.

If you have suffered a drop in income, it is worth checking with on which actions to take now and which can be left to come out in the final HMRC tax calculation.

HMRC guidance on options for paying a deferred payment on account is available.