January 21st, 2022

The 3 biggest threats to your finances in 2022 and what you can do about them

As we enter 2022, you may be wondering what the next few months will hold. While you’re probably hoping for the best, many people are understandably concerned that the new year may hold some surprises for us.

A recent study by interactive investor found that a stock market crash, the rising cost of living, and tax increases are considered the three biggest threats to personal finances. This is understandable as these are all legitimate concerns in the modern economic climate.

If you’re worried about the prospect of any of these issues and want to know what you can do about them, read on.

Many Brits are concerned about tax increases eating into their disposable income

While the government predicts strong economic growth for 2022, it is likely that ordinary Brits may struggle financially. According to a report published by the BBC, tax increases and rising inflation will mean that millions of households may be worse off financially.

As you may remember from our previous article about the chancellor’s autumn Budget, several tax rises will come into effect this year. Most notably, the government will be increasing National Insurance contributions (NICs) by 1.25 percentage points from April.

Furthermore, Dividend Tax rates will also rise 1.25 percentage points from April, although the ÂŁ2,000 allowance will remain at its current level.

What you can do about potential tax increases

If you want to minimise the impact that the tax increases will have on your wealth, it’s important to plan effectively.

For example, if you earn income from dividends, you may want to transfer some of these assets to your partner. This means that you can effectively double your ÂŁ2,000 allowance, allowing you to save more money in tax.

If you want to reduce your NICs while also boosting the amount that you save for retirement, you could also consider salary sacrifice. Essentially, this involves voluntarily reducing your salary in exchange for other benefits, such as greater pension contributions.

This can help you to save more for retirement while also reducing the effect that a rise in NICs would have on your wealth. Salary sacrifice won’t be suitable for everyone, however, so speak to us if you’re considering this.

Rising inflation means that many goods and services are quickly becoming more expensive

The second biggest fear of people surveyed was the increased cost of living due to the rising rate of inflation. According to figures from the Office for National Statistics, the Consumer Price Index (CPI) rose to 5.4% in the 12 months to December 2021.

This, coupled with the tax rises on the horizon, have made many people understandably concerned about the state of their finances. According to the Guardian, many households could be as much as ÂŁ1,200 a year worse off due to rising food, transport, and energy prices.

Rising inflation also poses a risk for the financial wellbeing of savers, as it eats away at the buying power of their money over time. This can pose an obvious problem, as it means that your cash loses its value.

What you can do about rising inflation

If you’re concerned about the prospect of rising food and utility costs, shopping around can help you to save money on your household bills.

Furthermore, if you’re worried about inflation eating into the buying power of your cash, you may want to consider investing it instead. This is because investments can generate stronger returns, which may outpace the rate of inflation.

Global economic disruptions have raised the prospect of another stock market crash

In 2021, the stock market saw strong growth as businesses began to adapt and recover from the economic impact of the coronavirus outbreak. According to the Guardian, the FTSE 100 index grew by 14.3% in 2021, its best performance since 2016.

However, while this is obviously heartening news, the UK still faces some serious economic issues.

One of the main problems that it currently must deal with is the disruption of global supply chains. This has made it difficult for many businesses to access the goods and materials they need, which affects their operations.

For example, the Guardian recently reported that the supply issues have posed a major problem for the UK construction industry. Not only are materials harder to acquire than this time last year, but they are often more expensive too.

With these issues in mind, it’s easy to see why many people are concerned about the prospect of a stock market crash this year.

What you can do about potential stock market volatility

If you’re worried about how this could affect your wealth, you may benefit from diversifying your portfolio. This involves holding a variety of investments from across different asset classes, economic sectors, and geographical areas.

Essentially, this is about not putting all of your eggs into one basket. As we discussed in a previous article about the benefits of diversification, having a balanced portfolio helps to make it more resilient to financial shocks.

To ensure that your wealth is properly protected against the threat of a stock market crash, working with a financial planner can benefit you. They can help you to ensure that your portfolio is sufficiently diversified and that you aren’t exposing yourself to unnecessary risk.

Get in touch

If you’re concerned about any of these prospects affecting your financial wellbeing, we can help. Email enquiries@prosserknowles.co.uk or click here to request a callback from one of our advisers.

Please note:

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.

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