3 personal finance risks in 2022 and what you can do about them

When you look forward to the year ahead, what do you consider to be the biggest risks to your personal finances? A poll from interactive investor has revealed the three biggest financial worries people have. While you may not be able to prevent things from happening, you could reduce the effect they have on your finances.

56% of people worry about a stock market crash

Given the stock market volatility experienced throughout the pandemic, the fact that more than half of people are worried about a stock market crash is not surprising.

In March 2020, as fears of a pandemic and global recession began to escalate, stock markets fell sharply. On 12 March, the FTSE 100, an index of the largest 100 companies trading on the London Stock Exchange, suffered the second-largest one day crash in its history. In the months that followed, investors experienced volatility as the Covid-19 virus spread and governments around the world imposed restrictions.

While many investments have stabilised and recovered, it’s understandable that investors remain concerned about the impact a stock market crash could have on their finances. It may have a significant impact on your goals too, such as when you can retire.

If you’re worried about the effect a crash could have on your finances, there are two things to keep in mind:

1. Your portfolio should take an appropriate amount of risk for you. All investments come with some level of risk, but the risk varies between investments. When building an investment portfolio, you should take care to create a balanced portfolio that reflects your risk profile. If you’d like help understanding your risk profile and how to ensure your investment decisions reflect this, please contact us.
2. You should invest with a long-term goal. It’s common for investments to experience volatility over the short term. Yet, historically, markets do recover over the medium and long term. This is why you should invest with a long-term time frame. This means your investments have an opportunity to recover following volatility.

22% say the rising cost of living is a threat to their finances

Inflation is rising and it will affect the outgoings of households across the UK.

Inflation is the measure of how the cost of living is rising. The Bank of England (BoE) has a target of 2% inflation each year. However, in November 2021, the rate was more than double this, at 4.2%, according to the BoE. The Bank suggests that inflation will peak at close to 5% in 2022, before gradually reducing.

For households, this means expenditure from grocery shopping to trips out are likely to start creeping up. Reviewing your budget and how rising prices will affect your outgoings can help put you in control.

There are several things BoE can do to control inflation, including increasing interest rates. If you’re a borrower, a rise in interest rates could mean you pay more interest on your mortgage, credit cards, and other forms of credit. While an interest rate hike hasn’t been announced yet, you should be aware of how it could affect your finances if introduced.

8% worry about the burden of tax increases

The government’s Covid-19 response has left a black hole in its finances. According to the National Audit Office, the total cost of measures announced up to the end of July 2021 is £370 billion. Government borrowing has reached its highest level since the end of the second world war, so tax increases may be introduced to plug the gap.

So far, the government has announced two increases that may affect you:

1. Introduction of the Health and Social Care Levy: National Insurance will increase by 1.25 percentage points in April 2022 as part of a Health and Social Care Levy. From 2023, this tax will be legislatively separate from National Insurance, and will appear on your pay cheque as a separate deduction. Individuals working past the State Pension Age, who are not liable for National Insurance, will be liable for the levy. As a result, your tax burden is likely to increase from April 2022.
2. Dividend Tax rate increases: If you receive dividends, you may also face a higher tax bill. From April 2022, the Dividend Tax rates will increase by 1.25 percentage points.

In addition to these two changes that could affect your tax bill, other allowances have been frozen until the 2025/26 tax year. These include the Personal Allowance, the Capital Gains Tax Allowance, and the pension Lifetime Allowance. These freezes have been dubbed a “stealth tax” and could mean your tax liability increases over the next few years, even if rates remain the same.

As the government reviews finances, further tax changes could also affect your outgoings. Making the most of allowances and exemptions can reduce your tax bill and help your money go further. It’s important to review your finances as changes are announced, as it may change what’s right for you.

If you have any worries about the year ahead and want to understand how they could affect your finances, please contact us.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.