Listening to yesterday’s Budget, which I thought was delivered with a commendable blend of conviction and ambition, I was struck by one over-riding thought: this is a Budget for inflation.
The Office for Budget Responsibility seems to agree and predicts that the Budget measures will add 1.1 per cent to inflation next year.
The key question for pension savers will be: is your self-invested personal pension (Sipp) or small self-administered pension scheme (SSAS) adequately protected against inflation?
Three inflationary factors to consider
Among several potentially inflationary measures in the Budget, I think of three in particular: a rise in minimum wages, changes to national insurance and bringing pensions under inheritance tax rules.
Let me explain.
For those aged 21 or over the national living wage goes up by 6.7 per cent next April to £12.21 an hour.
And for 18 to 20-year-olds who are on the national minimum wage, they will get a massive 16.3 per cent pay rise to £10.
If people on very low earnings spend their extra money in shops, this would fuel upwards price rises. Of course, not all will behave in this way but some might.
Most of the Budget headlines featured the new national insurance contribution rates, with employers set to pay contributions at 15 per cent of their staff's earnings rather than the 13.8 per cent previously.
Less prominence was given to the threshold at which employers start to pay national insurance contributions, which has shrunk from £9,100 per year currently to a lowly £5,000 per year.
This means proportionately the extra burden for employers is very high for low paid and part-time staff.
Employers in the retail and catering sectors, where currently margins are thin and profitability low, may have little scope to absorb the extra national insurance and could pass it onto consumers as price rises.
On the pension side the big change was to bring leftover pension pots on death into scope for IHT.
This will encourage some retirees to spend their pension rather than holding it back as a bequest for sons and daughters. Again, more money into the shops fuelling inflation.
In the savings space we saw another attack on buy-to-let investors with the hiking of the stamp duty surcharge to 5 per cent.
Where I live a two-bed flat suitable for renting out costs around £400,000 and will now come with a stamp duty tag of £27,500.
Investors who might have otherwise purchased a property to rent out will now be more likely to save in banks and Isas.
As a result savings that would have been locked up will now be highly liquid and likely to be nibbled into for spending, with concomitant upward pressure on prices.
Protecting pensions
One way to protect against inflation is to buy index-linked gilts, with a maturity date close to the retirement date.
Index-linked gilts can also be held inside a unitised fund or an exchange-traded fund structure, which may allow the fund’s manager to select a range of different coupons and dates, taking advantage of any temporary market mis-pricing in what is a pretty thin market.
