What economic factors could change your life in 2022? We are always told that financial planning is the key to long-term stability, but what about events outside our control?
Is there anything we can do to avoid being adversely affected by such factors – or use them to help make us wealthier over the next 12 months?
While no one knows for sure exactly what the new year will bring, here we highlight a few possibilities and the effect they may have on our finances.
New Covid-19 variants
The number one cause of uncertainty over the coming year is likely to be new variants of Covid-19, the virus that has caused mayhem for almost two years.
The spread of Omicron is already disrupting stock markets around the world as countries tighten restrictions to prevent their hospitals from becoming overwhelmed.
Scott Gallacher, director and chartered financial planner at Rowley Turton, suggested we could have higher unemployment if the UK government doesn’t offer more help to sectors such as hospitality.
“People who are worried about their jobs would be wise to get their finances in order by repaying debt, cancelling unnecessary contracts, and building up an emergency fund,” he said.
The Consumer Prices Index (CPI) has already increased by 5.1 per cent over the 12 months to November 2021. Further rises in inflation will mean goods and services becoming more expensive.
Andy Merricks, co-manager of the 8AM Focused Fund, doubts that the hikes, which are partly fuelled by shortages of goods and strong energy demand, will be maintained.
“I honestly can’t see inflation carrying on rising through next year, but you need to remember that 12 months is a long time,” he said.
Jason Hollands, managing director of Bestinvest, believes that people hold too much in cash deposits earning meagre interest rates, and should instead look at investing.
“With inflation rising, it is worth considering whether your mix between cash savings and longer-term investments is right,” he said.
Higher interest rates
UK interest rates have recently been increased to 0.25 per cent by the Bank of England’s Monetary Policy Committee to help keep inflation under control.
Andrew Goodwin, chief UK economist at Oxford Economics, believes the Omicron variant of Covid-19 will dictate whether further increases happen next year.
“If activity holds up, interest rates will rise further in 2022, though it’s hard to see the fog clearing enough to justify a hike in February,” he said. “If Omicron proves to be very damaging, the Bank of England could be forced to reverse course.”
Further increases will hit those on variable-rate mortgages – but could provide a mini boost to savers, according to Gallacher.
“The increase in interest rates might feed through to a small increase in savings rates, but savers will need much higher rate rises to cover the effects of higher inflation,” he said.
Higher household bills
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, warns energy bills may rise after the review of the price cap, which limits the rates suppliers can charge for their default tariffs.
“Given the enormous rises in the wholesale price of gas, and the huge cost of company failures needing to be picked up by the industry, we can expect the cap to rise by hundreds of pounds,” she said.
Coles also pointed out that the cap wasn’t a “fixed and finite” amount, but just a cap on the cost for the average user.
“It means those with big families, or large or inefficient properties, could end up with significantly larger hikes,” she added.
Rising house prices
House prices have soared over the past year, with the average UK property now costing a record £272,992 and growth at a 15-year high, according to the Halifax.
Valuations are also being kept high by a severe shortage of properties for sale, according to the Royal Institution of Chartered Surveyors (RICS).
Simon Rubinsohn, RICS chief economist, said: “It’s likely house prices will continue to move higher through the coming year, albeit at a somewhat slower pace than over the past twelve months.”
Of course, whether this is a blessing or a curse depends on your personal circumstances. If you’re selling up and downsizing then you’re on course to make a handsome profit.
However, if you are moving up the ladder – or saving for your first home – then this will make buying a property even more expensive.
Higher dividend tax begins
Sarah Coles at Hargreaves Lansdown points out that the dividend tax will rise in April to 8.7 per cent for basic rate taxpayers, 33.7 per cent for higher rate, and 39.3 per cent for additional rate taxpayers.
“This will affect those who make more than the dividend allowance of £2,000 a year in investments, or own their own company and pay themselves in dividends,” she said.
The most effective way to cut dividend tax on investments is to make use of your ISAs. “You can shelter up to £20,000 a year in an ISA, and all income and growth is completely tax-free,” she added.