AUTUMN 2011 CLIENT NEWSLETTER

INFLATION REACHES NEW HEIGHTS

The September 2011 inflation numbers, published in mid-October, were worse than expected and bad news for the government.

Remember John Major?

The annual rate of inflation, as measured by the Retail Prices Index (RPI), was 5.6%, the highest level since June 1991. More mature readers may remember that as a time when John Major was Prime Minister. Those with the best memories may also recall that base rate was a more inflation-challenging 11.5% at the time.

The government’s preferred measure of inflation, the Consumer Prices Index (CPI), jumped 0.7% to 5.2%, equal to its highest ever level since the CPI started being measured in January 1997. The Bank of England’s central inflation target is 2%, but CPI has now been above that threshold since December 2009.

The importance of September

The September inflation numbers are important because they are widely used for indexation of tax allowances and bands, social security benefits and pensions, both private and state. In recent years there have been several tweaks to this general principle, most of which have been designed to benefit the Exchequer. From what has been previously announced, we now know that unless Mr Osborne has a change of heart, the following changes will apply for 2012/13:

Income tax Last March’s Budget announced that for 2012/13 the under-65 personal allowance will have an above inflation rise of £630 (8.4%) to £8,105. However, this increase will be accompanied by a £630 reduction in the size of the basic rate band. The net result will be that the starting point for higher rate tax will remain unchanged in 2012/13, meaning that more people will become 40% taxpayers. Virtually all other income tax personal allowances and limits are due to be increased in line with the RPI.

National Insurance Contributions (NICs) 2011/12 saw an variety of amendments to NICs, the most significant being the 1% increase in all the main rates. For 2012/13 most limits should increase in line with CPI. However, the Class 1 Upper Earnings Limit and Class 4 Upper Profits Limit will be frozen, as they are aligned with the
(unchanged) starting point for higher rate tax. No rate changes are expected.

CGT Annual Exemption The 2011 Budget announced a change in the basis for annual increases from RPI to CPI, so the exemption will rise by £600 to £11,200 for 2012/13.

ISAs ISA limits rise in line with CPI. Curiously enough, on the day the September inflation figures appeared, the Treasury quickly confirmed that the 2012/13 ISA contribution limit will be £11,280. It made no comment about other 2012/13 revisions.

State Pensions The ‘triple lock’ for the basic state pension introduced by the Coalition Government means that annual increases are the greater of earnings inflation, price inflation and 2.5%. With earnings inflation pitifully low (2.8% for total pay at the last reading), price inflation will be the lock for 2012/13, as it was last year. However, for 2012/13 and future years the measure of price inflation will be CPI whereas for 2011/12 it was the RPI. Other state pensions (eg graduated pension) should also rise in line with CPI, as they did for 2011/12.

Private Pensions Pensions which are subject to statutory increases – normally those from final salary occupational schemes – should rise by the statutory limits of 2.5% and/or 5% because of the high level of inflation on either the RPI or CPI measure. Thus the real value of those pensions will fall.

ACTION
The sharp rise in inflation could mean your financial plans need review. For example, life cover set up five years ago now should be increased by nearly a fifth just to maintain its buying power.

Call us now to arrange a year-end review of your financial planning.

STATE PENSION AGE: MORE CHANGES

Last year the government announced plans to bring forward to April 2020 the date when the State Pension Age (SPA) would rise to 66. The proposal attracted a large volume of considerable criticism, particularly for its impact on women in their late 50s. At worst, a woman born between 6 March 1954 and 5 April 1954 (now aged 57) would have seen her SPA move out by two years, from 6 March 2018 (about age 64) to 6 March 2020 (about age 66).

The kicking and screaming has now prompted a minor change of plan.

For April, read October

Within days of the Third (and final) Reading of the Pensions Bill 2011, the government published an amendment that made the SPA 66 date 6 October 2020 rather than 6 April 2020. That extra six months has allowed the parliamentary draftsmen to revise the phasing in of the new SPA, so that no woman will see more than 18 months added to her SPA. Men will also benefit from the new schedule because the phasing from an SPA of 65 (in December 2018) to 66 applies to both sexes.

In practice you will only benefit if you were born between 6 January 1954 and 5 October 1954.