Financial forecast and how to plan ahead for it

01 February 2012

by Sam Barrett for Standard Life

Standard Life’s Julie Russell talks us through the implications of five expert predictions for the year ahead.

1. Interest rates

Andrew Milligan*: "The Bank of England will hold interest rates at current levels all year; the key issue is how much quantitative easing is carried out to support the economy."

What this means for savers


With interest rates low, earnings from your savings will struggle to beat inflation. “Use your tax-free cash ISA allowance first, then, if you’re happy to tie your money up, look for a fixed-rate bond,” says, Julie. "If you’re comfortable taking some investment risk, consider investing longer term in a stocks and shares ISA."

What this means for home owners


Low interest rates are good news for borrowers, says Julie. "If you have more than 25% equity in your property, consider remortgaging to take advantage of a lower rate. Shop around and remember to take into account the fees as well as the interest rate." You could also overpay your mortgage while interest rates are low as this will reduce the total amount you repay.

2. The eurozone

Andrew Milligan*: "We do not anticipate the break up of the eurozone, as politicians recognise the dangers involved, but markets will continue to act very nervously to news from the eurozone."

What this means for investors


With the current volatility, investors will need to pay close attention to where their money is invested. “Diversification is increasingly important when markets are volatile. By ensuring you have a broad spread of investments, volatility can be reduced,” explains Julie.

You can do this yourself or access ready-made portfolios through Standard Life’s MyFolio Funds. These give you exposure to a wide selection of asset classes to deliver diversification and help smooth out returns. Read more about Standard Life’s MyFolio funds.

3. Inflation

Andrew Milligan*: "Inflation is already peaking and will slow steadily into 2012 towards the Bank of England’s target [of 2%], as the impact of the VAT increase and higher energy prices falls away."

What this means for long-term-investors


Slowing inflation will be welcomed by investors looking at long-term goals. When it comes to beating inflation, stocks and shares may be the best place to be as, over the long term, they should outperform cash. Inflation has a long way to fall before it dips below most interest rates on many savings accounts.

Past performance is not a reliable guide to future performance.

What this means for people approaching retirement


Although inflation may be slowing through 2012, its effects on pensioners’ spending power may tempt those approaching retirement to take out an inflation-linked annuity. Such products ensure your future pension income keeps pace with inflation.

4. Pensions

Recent European economic conditions have driven an increasing demand for UK gilts. This means that the annuity rates which UK gilts support have been falling, and there is no expectation that these will improve in the near future.

What this means for people more than five years from retirement


How annuity rates move won’t affect your approach to saving for retirement but Julie recommends building up your pension now if you can afford to. "The more money you have in your pension pot, the more options you will have later," she says. "Take advantage of tax relief and employer contributions while still working."

What this means for people nearing retirement


"Because fund values and annuity rates are low, these customers are asking if they should delay their pension," says Julie. "You could just take tax-free cash but there is no guarantee of a quick improvement, so you need to consider whether any annuity income in the meantime could outweigh the improved income you may get back by waiting."

5. Tax on savings

Andrew Milligan*: "No major changes, as the government balances the need to encourage saving and spending. The annual limits on tax-free ISAs will increase as already announced."

What this means for savers


With interest rates low, paying tax on savings can make your interest virtually disappear. "Use your cash ISA allowance as interest is paid tax-free," says Julie. You can save up to £10,680 into an ISA in the 2011/2012 tax year, of which £5,340 can be in cash. Next year, the overall ISA allowance rises to £11,280.

What this means for married couples


Those married or in civil partnership can minimise tax by placing any savings and investments that are taxed in the name of the person who pays the lower rate of tax. And, if necessary, use both of your capital gains allowances, which you report to HMRC.

Remember

Investments may go up or down and you may get back less than you put in. Tax rules and legislation may change. The value of tax relief may change and will depend on your financial circumstances. The information we have given is based on our understanding of law and current HM Revenue & Customs practice.

About this article

Please note that the opinions and comments expressed by contributors in the article are personal and not necessarily those of Standard Life group (Standard Life Plc and its subsidiaries).

The article is intended to be for information purposes only and is not intended as promotional material or to provide financial advice. You should obtain your own professional advice as to the suitability and availability of any products or services featured as each individual’s circumstances are unique.

Standard Life group accepts no responsibility for the availability of, and the information contained in, any of the third-party websites referred to in links to which have been provided for general information purposes only. The websites concerned, and their contents, are not endorsed or promoted by Standard Life group in any way, unless otherwise indicated.

Please note that the opinions and comments expressed by contributors in the article are personal and not necessarily those of Standard Life group (Standard Life Plc and its subsidiaries).

The article is intended to be for information purposes only and is not intended as promotional material or to provide financial advice. You should obtain your own professional advice as to the suitability and availability of any products or services featured as each individual’s circumstances are unique.

Standard Life group accepts no responsibility for the availability of, and the information contained in, any of the third-party websites referred to in links to which have been provided for general information purposes only. The websites concerned, and their contents, are not endorsed or promoted by Standard Life group in any way, unless otherwise indicated.