What Next For Inflation?

The UK has now experienced deflation for the first time since records began in 1996.  The Office for National Statistics believes that the last time the UK experienced deflation was in the 1960s.

This was so long ago that you may well be asking yourself “What exactly is deflation and what does deflation mean for our economy?”.

Inflation v Deflation - What's The Difference?

In very simple terms, inflation is when the overall cost of living goes up and deflation is when the cost of living goes down.  The word overall is important because prices of different items can go up and down at different times.

How Is The Overall Cost Of Living Measured?

There are two main measures used for determining changes in the cost of living.  The older method is called the Retail Price Index (RPI).  This was introduced in June 1947.  The newer method is called the Consumer Price Index (CPI) and was introduced in 1996.

Both systems use an “average basket of goods” to keep track of how much “average consumers” are spending.  In other words, they select a range of items which they think most people need (or want) to buy.  They then track the prices of these items.

There are, however, important differences in what they track.  For example, the RPI includes the cost of housing (including the impact of Council Tax) but the CPI does not.  They also use different methods for calculating the average.

Summing all this up in a nutshell, the CPI is almost always lower than the RPI.

Can Inflation Be Managed?

It is the Bank of England's job to try.  The BoE runs the Monetary Policy Committee.  This has the job of achieving exactly 2% inflation per annum.

Of course, that's a difficult job so the Bank gets a bit of breathing space.  The government accepts inflation of between 1% and 3% per year.

If, however, inflation goes either higher or lower, the BoE is called upon to explain itself.  The Governor of the Bank of England, must provide a public, written explanation of why it missed its target.

It must also advise the government what it intends to do to get back on target.  The BoE's main tool for managing inflation is the use of interest rates.  In very basic terms, raising interest rates encourages people to save.  Lowering interest rates encourages people to spend.

Why Does The Bank Of England Try To Keep The Cost Of Living Going Up?

In very simple terms, deflation has much the same effect as waiting for the January sales to buy Christmas presents.

Customers assume (rightly or wrongly) that the item(s) they want will be cheaper after Christmas so they wait until then to buy them.

Extended periods of deflation can essentially become a time of Mexican standoff.  Buyers get used to seeing prices dropping so they put off making purchases to get lower prices.

Unfortunately this can put producers (and retailers) out of business.  Over the long term, this reduces supply and can stimulate inflation.  In the short term, however, it can lead to painful redundancies.

At the moment, for example, low oil prices are leading to layoffs in the oil industry.

So Is Deflation Always Bad?

That is an interesting question.  It is possible that some deflation on essential items such as food and utilities might actually be helpful.  It would give hard-pressed families a respite.

It might even be enough to free up money for other purposes.  For example, it might allow families to pay down debts.  It might allow them to treat themselves to some non-essential purchases.

The question would be whether or not the end producers would be able to support deflation for any meaningful length of time.  If not, then the pendulum could swing the other way towards high inflation – and cause a lot of pain in the process.

http://www.theguardian.com/news/datablog/2009/mar/09/inflation-economics

http://www.rateinflation.com/inflation-rate/uk-historical-inflation-rate

http://www.telegraph.co.uk/finance/economics/11614740/Its-official-Britain-is-in-deflation.html

http://en.wikipedia.org/wiki/Retail_Price_Index

http://en.wikipedia.org/wiki/Consumer_Price_Index_(United_Kingdom)

http://moneyweek.com/merryns-blog/the-difference-between-cpi-and-rpi-and-why-it-matters-55018/

http://www.bankofengland.co.uk/monetarypolicy/Pages/framework/framework.aspx  

http://www.theweek.co.uk/62180/deflation-uk-prices-are-falling-but-is-that-a-bad-thing

http://www.bbc.co.uk/news/business-30393690

For more information please do not hesitate to contact the team at Ward Williams Financial Services Ltd on 01932 830664 or by email on wwfs@wardwilliams.co.uk.

A Matter Of Life And Death

There is one topic that no one likes to think about - death. And yet, it is something that we must prepare ourselves for in order to take care of our loved ones and ensure family protection.

Making plans for the end of life is a vital task and one that, if not dealt with by each of us, falls to our families and next of kin to arrange.

There are two main tasks that everyone with dependents must undertake in order to protect their loved ones, arranging life insurance and writing a will. This article is a quick guide to help you explore the options available to you.

Why do I need life insurance?

Life insurance is a policy that is taken out to pay off any major expenses such as mortgages, outstanding debts or university fees for children if you die unexpectedly. There are two main types of policy, term insurance and whole life cover.

Term insurance is the more basic of the two types of cover and insures a person for a certain period of time and up to a certain value.

This type of cover will only pay out if you die within the specified period of the policy, and if you live longer, the premiums that you have paid into the scheme are non refundable.

You can take out decreasing term cover, meaning that over the years, the contributions you pay into the scheme lessen.

This makes sense as you pay off your mortgage month by month, the lump sum your loved ones would need if you unexpectedly died would be smaller. It also means that the policy will become more affordable over time.

Whole Life Policies

Unlike term insurance, whole life policies are not limited by time, they only expire when you do. As with the other types of policy, they pay out when you die, but you do not have to guess when that might be.

Generally, these policies cost more, but they offer the you more flexibility and do not leave loved ones in serious financial hardship if you die following the policy’s expiry.

Why should I make a Will?

With the advent of the internet, making or changing a will has become quicker and easier than ever before. If you have ever asked ‘How do I make a Will?’, it is now easier and more straight forward to do than it has ever been.

A Will is a simple legal document that states what should happen to your money and property after your death. If you die without one, your estate will be legally termed intestate.

This means that a loved one will have to apply for probate - the right to be the executor of the estate and decide what happens to your wealth.

There are legal guidelines for executors on how wealth must be shared out in this instance, but without your own Will, you cannot be sure that your wishes will be carried out.

What could happen if I do not make a Will?

Writing a Will can also limit the amount on inheritance tax that you are exposed to, meaning that if you die without one, the tax man might be able to take a considerable part of your estate.

Despite the importance of writing a will in order to protect your wealth when you die, a 2014 survey revealed that only 48 percent of adults in the UK have drawn one up. This lack of planning might partly be due to the fact that people generally tend to avoid considering their own mortality. It might also be due to a lack of quality information about the problems dying intestate can cause.

For more information please do not hesitate to contact the team at Ward Williams Financial Services Ltd on 01932 830664 or by email on wwfs@wardwilliams.co.uk.

How Pension Changes Affect Everyone

In the past three years there have been dramatic changes to the way people save for their pensions in the UK and the role that employers have in helping them to build up a pension pot.

The process of setting up new workplace pension schemes, called auto enrolment, has been ongoing since 2012 and employers of all sizes, from major corporations down to individuals with nannies or carers have to comply.

This blog is a quick guide to your rights and responsibilities if you are an individual employer and just employ one person to help you.

What Is Auto Enrolment?

The government’s rationale for the auto enrolment pension scheme is to plug the gap in pension provision.

Between 2010 and 2012 the Office of National Statistics calculated that 45 percent of men and 49 percent of women in the UK had no private pension provision at all.

Large companies were the first employers who were required to provide auto enrolled workplace pensions for their staff.

Between 2012 and 2014, large, medium and smaller businesses were added to the roll out of auto enrolment, and now in 2015 individuals with single employees are also obliged to provide pension cover.

Do I Need To Contribute Towards My Nanny's Pension?

If you employ anyone over the age of 22 who is paid more than £10,000 you need to provide them with a pension. The Government has sent letters to those affected, but still, many people are unaware of their legal responsibilities.

Employers with 1-30 members of staff will go through the auto enrolment process over the next two years, and by October 2017 all employers will be expected to have made provision for their staff.

The amount that you will be obliged to pay in pension contributions for your employee(s) depends on the PAYE (pay as you earn) number that HMRC assigns to your employee(s).

What To Do

If you employ someone (a carer or nanny for example) you may need to take action.

The government’s regulations are backed up by fines and penalties, so it is important to understand your responsibilities and comply with them by the deadline.

You might already have received a letter with the start date for your first payment into an employee’s pension scheme, most employers are given 18 months notice from the start of the scheme.

If you are unsure about when you need to start making payments, you can check with the Pensions Regulator.

How Much?

Initially, you will need to contribute one percent of the employee’s qualifying income. The employee will have to contribute 0.8 percent of their income and the government will add and additional 0.2 percent through tax relief.

Your contribution will rise to two percent in the second year of payments, but the qualifying income is not the employee’s entire salary.

It is any earnings between £5,824 and £42,385, therefore, if you pay an employee £10,000, you will only have to pay a pension on £4176 (10,000 - 5,824), meaning that your contributions will be £41.76 in the first year and £83.52 thereafter.

Getting Help

Many people find the idea of organising pension payments for others daunting and difficult, but fortunately there are numerous payroll companies who, for a small charge, can organise pension payments. Even if you outsource the task of pensions payments to an agency, the cost will still be born by you.

For more information please do not hesitate to contact the team at Ward Williams Financial Services Ltd on 01932 830664 or by email on wwfs@wardwilliams.co.uk.