The Basics of Inheritance Tax

What is Inheritance Tax?

Understanding the basics of Inheritance Tax is crucial for anyone planning on leaving a legacy. Understanding the nuances of IHT can help minimise inheritance tax liabilities and maximise the legacy left behind. This is a short guide which covers the basics of inheritance tax, its reliefs, exemptions, and lifetime gifts. Simply, Inheritance Tax is a tax on the estate (property, money, and possessions) of someone who has died. In the UK, IHT is charged at 40% on estates valued above the tax-free threshold, known as the Nil Rate Band (NRB), which is currently £325,000.

Inheritance Tax Exemptions

There are several exemptions which allow you to transfer part of your estate without the gift being subject to Inheritance Tax.

  • Spouse or Civil Partner Exemption: Transfers between spouses or civil partners are exempt from IHT, regardless of the amount.
  • Annual Exemption: Individuals can give away up to £3,000 each tax year as an exempt gift.
  • Small Gifts Exemption: Up to £250 per person per year can be given away to any number of people.
  • Wedding or Civil Partnership Gifts: Parents can gift £5,000, grandparents can gift £2,500, and anyone else can gift £1,000 tax-free for a wedding or civil partnership.
  • Regular Gifts Out of Income: Gifts made from surplus income (after all living expenses have been covered) are exempt, provided they do not reduce the donor’s standard of living.

Inheritance Tax Reliefs

Furthermore, there are several reliefs that allow you to reduce the amount of IHT payable on your estate:

  • Nil Rate Band: Each individual has use of their £325,000 Nil Rate Band. This is the amount of your estate that can be passed onto your beneficiaries free from inheritance tax. Effectively, married couples have an allowance of £650,000 between them.
  • Residence Nil Rate Band (RNRB): This additional threshold is available if a home is passed to direct descendants (children or grandchildren). The RNRB is currently set at £175,000, potentially increasing the total tax-free threshold to £500,000 for individuals or £1,000,000 for married couples.
  • Business Relief: Business assets can qualify for relief of either 50% or 100%, depending on the type of asset. This relief applies to sole traders, unincorporated businesses, and shares in unlisted companies.
  • Agricultural Relief: Similar to business relief, agricultural property can qualify for 50% or 100% relief, depending on the type of property and its use.
  • Charitable Donations: Any part of the estate left to a registered charity is exempt from IHT. Furthermore, if 10% or more of the net estate is left to charity, the IHT rate on the rest of the estate can be reduced to 36%.

Lifetime Gifts

Gifts made in an individuals lifetime can either be Potentially Exempt Transfers (PETs) or Chargeable Lifetime Transfers (CLTs):

  • Potentially Exempt Transfers (PETs): Simply, a Potentially Exempt Transfer is a gift to another individual, bare trust or disabled trust which is not exempt. In order for the gift to fall outside of your estate you have to live for 7 years from the date of the gift. If the donor dies within seven years, the gift becomes chargeable and is included within your estate for inheritance tax purposes. Depending on the size of the gift and how long you survived since it was made, you may be able to benefit from Inheritance Tax Taper Relief.
  • Chargeable Lifetime Transfers (CLTs): A Chargeable Lifetime Transfer is a gift that is not exempt or potentially exempt. The most common CLTs are gifts into certain types of trust such as a discretionary trust or interest in possession trust. Again, the donor needs to survive for 7 years from the date of the gift for it to fall outside their estate for inheritance tax purposes. If the total of all chargeable transfers in a 7 year period exceeds the nil rate band then there will be a 20% tax charge on the excess over the Nil Rate Band.


Understanding the basics of Inheritance Tax and structuring your affairs in a tax efficient way can help you to maximise the value of your estate that you can leave to your loved ones. As Chartered Financial Planners it is our role to assist clients in managing their estates to minimise IHT liabilities. If you would like to benefit from a no fee initial chat, then please get in touch via our Contact Us page.

The Importance of Writing a Will

The Importance of Writing a Will

In the realm of financial planning, the importance of writing will cannot be overlooked. Despite its crucial role, many individuals in the UK overlook this important task. As an independent financial planning practice, we aim to shed light on why creating a will is essential, the benefits it brings, and the peace of mind it provides.

Why Write a Will?

1. Protecting Your Loved Ones

A will ensures that your assets are distributed according to your wishes. Without a will, the distribution of your estate will be determined by the rules of intestacy, which may not reflect your desires and can leave loved ones in a difficult position. Writing a will allows you to:

  • Specify beneficiaries
  • Appoint guardians for minor children
  • And provide for dependents who might otherwise be overlooked
2. Minimising Family Disputes

Clear instructions in a will can significantly reduce the potential for family disputes. By clearly outlining your wishes, you can help prevent disagreements among your beneficiaries and ensure a smoother transition of assets.

3. Tax Efficiency

Proper estate planning via your will can help minimise inheritance tax liabilities. By structuring your estate efficiently, you can ensure that more of your wealth is passed on to your beneficiaries rather than being lost to taxes.

4. Supporting Charitable Causes

If there are charities or causes you care deeply about, a will allows you to leave a legacy gift. This can be a powerful way to support organisations that have made a difference in your life or reflect your values.

The Components of a Will

A comprehensive will typically includes the following elements:

  • Executor Appointment: Choosing someone you trust to carry out your wishes.
  • Guardianship Provisions: Designating guardians for any minor children.
  • Asset Distribution: Detailing how your assets will be divided among your beneficiaries.
  • Specific Bequests: Listing any particular items or amounts of money you wish to leave to individuals or organisations.
  • Residue of the Estate: Deciding who will receive any remaining assets after specific bequests are fulfilled


Writing a will is a fundamental aspect of financial planning that ensures your wishes are respected and your loved ones are provided for. By taking the time to draft a will, you can secure your legacy and provide peace of mind for yourself and your family.

Disclaimer: This blog post is for informational purposes only and does not constitute legal advice. Always consult with a qualified legal professional when drafting a will.

How Much is Enough to Retire on?

Retirement planning is a journey filled with uncertainties, but one question remains constant: How much is enough to retire on? It’s a question that demands careful consideration, personalised analysis, and strategic planning. As Chartered Financial Planners, we understand the importance of setting realistic retirement goals and crafting a financial roadmap to achieve them. In this blog post, we’ll delve into the factors that influence your retirement number and provide insights on how to determine what’s “enough” for you.

Understanding Your Retirement Needs

The first step in determining your retirement number is to assess your future financial needs. Consider your core expenditure, discretionary expenditure, anticipated expenses, and any additional financial goals you wish to pursue during retirement. Will you be traveling frequently, pursuing hobbies, or supporting loved ones? By splitting your retirement expenditure into its core and discretionary components you can identify your minimum income requirement. Remember, its important to factor in inflation and the value of any outstanding debts.

Calculating Your Retirement Income

Once you have a clear understanding of your retirement expenditure needs, the next step is to calculate your retirement income. This includes income from the state pension, defined benefit pensions, personal pensions, workplace pensions, ISAs and other investments. Take into account the expected rate of return on your investments and the impact of taxes on your retirement income.

Assessing Your Retirement Assets

Evaluate your current retirement savings and investments to determine if they align with your retirement goals. Consider the asset allocation of your investment portfolio, your risk tolerance, and the potential for growth over time. A key point to consider is your time horizon to retirement. Generally speaking and assuming you have the risk tolerance, the further away your retirement date the more risk you can bare.

Factoring in Inflation and Longevity

Inflation erodes the purchasing power of your money over time, so it’s crucial to account for inflation when calculating your retirement needs. Consider using a conservative inflation rate to adjust your retirement expenses accordingly. Additionally, with advances in healthcare and lifestyle, many individuals are living longer in retirement. Factor in your life expectancy when planning for retirement to ensure your savings will last throughout your golden years.

Seeking Professional Advice

Determining your retirement number is not a one-size-fits-all calculation. It requires careful analysis, consideration of various factors, and often the expertise of a financial adviser. An independent financial adviser can provide personalised advice tailored to your unique financial situation, helping you navigate complex investment decisions, optimise your retirement savings, and stay on track to achieve your retirement goals.


In summary, the question of how much is enough to retire on is a complex one that requires careful consideration and personalised analysis. By assessing your retirement needs, calculating your retirement income, evaluating your retirement assets, factoring in inflation and longevity, and seeking professional guidance, you can gain clarity on your retirement number and take proactive steps to achieve financial security in retirement. Remember, it’s never too early to start planning for retirement, so start today and pave the way for a secure and fulfilling retirement.

How Pensions Can Play an Important Role in a Financial Plan

What is a Pension?

One of the most powerful tools in a financial planners arsenal is the humble pension. Pensions offer a range of benefits that can significantly enhance your financial stability and peace of mind in later life. This blog post will explore how pensions can play an important role within a financial plan.

Simply, a pension is a type of long term savings plan that is designed to help you save money for later life. In order to encourage you to save for retirement, the government provide various tax advantages for saving into a pension.

Well, what are the benefits?

Tax relief on your contributions

Pensions are renowned for their tax advantages, making them an attractive option for retirement savings. Contributions to pensions benefit from tax relief at your highest marginal rate, meaning you essentially receive free money from the government on top of your contributions. For basic-rate taxpayers, this translates to a 20% boost, while higher-rate and additional-rate taxpayers can claim back even more. This added tax relief can help you build up your pension pot faster. The downside is that you cannot access your pension fund until 55 (increasing to 57 from April 2028).

Tax free growth

The contributions invested in your pension grow free of income and capital gains tax. This makes pensions a very tax efficient way of saving for retirement.

Tax free cash

Generally speaking, when you come to access your pension, you can normally take 25% of its value as a tax free lump sum. This could be used to provide you with a tax efficient income in retirement or be used to pay off your mortgage or go on that dream holiday.

Tax Planning

From a financial planning perspective, pensions are an important tax planning tool. Depending on a clients position, contributing money into a pension can reduce a capital gains tax liability, reduce a clients income tax liability, reinstate a clients income tax personal allowance, or wipe out a child benefit income tax charge. Therefore pensions provide scope for clever financial planning depending on the clients circumstances.

Estate Planning

Additionally, Pensions offer valuable estate planning opportunities, with certain types of pensions allowing you to pass on your remaining pension pot to your beneficiaries tax-efficiently upon your death. By carefully considering your pension options and making appropriate arrangements, you can ensure that your loved ones are provided for after you’re gone, leaving a lasting legacy for future generations.

And the Downsides?

At the end of the day, saving into a pension isn’t for everyone, and individuals should way up the pros and cons given their individual position. So what are some of the Cons?

  • Currently, you cannot access your pension until 55 (increasing to 57 from April 2028). Therefore, you need to be comfortable that you are giving up access to your money for a period of time.
  • 25% of your pension can normally be taken as an income tax free lump sum. However, the remaining 75% is taxable at your marginal rate of income tax.
  • Pensions can be seen as difficult to understand due to the rules and regulations surrounding them.
  • The value of your pension can fluctuate with the market and therefore your pension will go up and down over time.


Pensions are great tax planning and savings tool given the right circumstances. To see if pension saving is for you, then please feel free to get in touch via our contact page.

Should I Save or Pay Off Debts?

Today, we’re delving into a common dilemma faced by many individuals: whether to prioritise saving or paying off debts. It’s a question that can have a significant impact on your financial wellbeing, and the answer isn’t always straightforward. Join us as we explore the factors to consider when making this decision.

Understanding Your Financial Situation

Before we dive into the debate of saving versus paying off debts, it’s crucial to assess your current financial situation. Take stock of your income, expenses, assets, and liabilities. Understanding where you currently stand will provide clarity as you make decisions regarding saving and debt repayment.

The Case for Saving

Before paying off debts it can make sense to establish a sufficient emergency fund. This will provide you a safety net in case of unexpected expenses or loss of income, and can avoid you having to build up more debt. We often recommend having three to six months’ worth of living expenses saved in an easily accessible account.

The Importance of Debt Repayment

Debt can be a significant obstacle to financial freedom. High-interest debt, such as credit card debt or payday loans, can quickly spiral out of control if left unchecked. Prioritising debt repayment can save you money in the long run by reducing the amount of interest you’ll pay over time. Plus, eliminating debt can improve your credit score, free up more money to put toward your savings goals, and provide you with peace of mind.

Should I Save or Pay Off Debts?

So, should you save or pay off debts? The answer depends on your individual circumstances. Here are some factors to consider:

Interest Rates: Compare the interest rates on your debts to the potential returns on your savings. If your debts have high-interest rates, focusing on debt repayment may yield greater financial benefits in the long term.

Emergency Fund: If you don’t already have an emergency fund, prioritise saving until you have enough set aside to cover at least three months’ worth of living expenses. Once you have a safety net in place, you can shift your focus to debt repayment.

Psychological Factors: Some people find peace of mind in paying off debts, even if it means temporarily delaying savings goals. Others prefer to have a financial cushion in the form of savings before aggressively tackling debt. Consider what approach aligns best with your values and priorities.


In the debate between saving and paying off debts, there’s no one-size-fits-all answer. It’s essential to evaluate your financial situation, consider your goals, and weigh the pros and cons of each approach. Whether you choose to focus on building savings, tackling debt, or striking a balance between the two, the most important thing is to take proactive steps toward financial stability and security. Remember, small changes today can lead to significant rewards tomorrow.

The Importance of Financial Protection

Financial Protection

In the dynamic landscape of personal finance, planning for the future requires a comprehensive approach. While investing and saving are pivotal components, it’s equally important to establish a safety net that protects you and your loved ones from unforeseen challenges. In this blog post, we’ll delve into the importance of three key insurance policies – Life Assurance, Income Protection, and Critical Illness cover, and how they play a crucial role in providing you with financial protection.

Life Assurance

Life Assurance is a fundamental pillar of financial planning. It pays out either a lump sum or regular income in the event of your death which gives your dependants financial support after you’re gone. This pay out can be used to redeem mortgages, pay off other liabilities or be used to provide for your family. Simply, Life Assurance ensures that your family is protected from the economic hardships that may arise following your passing.

Financial Protection

There are two main types:

Term Assurance Policies

These run for a fixed period of time, known as the ‘term’ of the policy, such as five, ten or 25 years. They only pay out if you die during the policy.

There are three kinds of term policies.

  1. Level – pays as a lump sum if you die within the agreed term. The level of cover stays the same throughout. This is the most simple and affordable option.
  2. Decreasing – the level of cover reduces each year. It’s designed to be used with repayment mortgages, where the outstanding loan decreases over time.
  3. Increasing – the level of cover rises over the term of the policy, to keep up with inflation.

Whole of Life Policies

These pay out no matter when you die, as long as you keep up with your premium payments.

They’re often used to help towards a funeral or for Inheritance Tax planning.

However, they’re typically more expensive than shorter-term policies. There’s also a possibility that if you live longer than you expected, you could end up paying more in than you’ll get out.

Income Protection Insurance

The ability to earn an income is one of your most valuable assets. Income Protection acts as a shield, offering a financial safety net if you find yourself unable to work due to illness or injury. This policy provides a regular income stream, ensuring that your financial commitments, such as mortgage payments, utility bills, and other living expenses can continue to be met. It’s a proactive measure that empowers you to face life’s uncertainties without compromising your financial stability.

How does it work?
  • Income protection provides regular payments that replace part of your income if you’re unable to work due to illness or an accident.
  • It pays out until you can start working again – or until you retire, die or reach the end of the policy term – whichever is sooner.
  • It typically pays out between 50% and 65% of your income if you’re unable to work.
  • It covers most illnesses that leave you unable to work – either in the short or long term (depending on the type of policy and its definition of incapacity)
  • It can be claimed as many times as you need to while the policy lasts.

There’s often a pre-agreed waiting (‘deferred’) period before the payments start. The most common waiting periods are 4, 13, 26 weeks and a year. The longer you wait, the lower the monthly premiums.

It’s not the same as critical illness insurance, which pays out a one-off lump sum if you have a specific serious illness.

Critical Illness Cover

Critical illnesses can strike anyone, at any time. The financial implications of a serious illness extend beyond medical expenses, lifestyle adjustments, and potential loss of income. Critical Illness cover provides a lump sum pay-out upon diagnosis of a covered condition. Therefore it provides financial flexibility to focus on your recovery without the burden of worrying about your financial obligations.

Financial Protection

How does it work?

Critical illness cover supports you financially if you’re diagnosed with one of the conditions included in the policy. The tax-free, one-off payment helps pay for your treatment, mortgage, rent or changes to your home, such as wheelchair access, should you need it.

Critical illness insurance will pay out if you get one of the specific medical conditions or injuries listed in the policy. It only pays out once, after which the policy ends.

Examples of critical illnesses that might be covered include:

  • stroke
  • heart attack
  • certain types and stages of cancer
  • conditions such as multiple sclerosis
  • major organ transplant
  • Parkinson’s disease
  • Alzheimer’s disease
  • multiple sclerosis
  • traumatic head injury.


In summary, these insurance policies provide you with peace of mind and financial protection. They provide stability to your overall financial plan, and help keep your plan on track should the worst happen. By integrating these policies into your financial plan, you not only safeguard your present but also pave the way for a secure and resilient financial future. Contact us today to embark on a journey towards financial peace of mind.




The Importance of an Emergency Fund

The Basics

Welcome to another edition of our personal finance blog! Today, we’re diving into a fundamental aspect of financial planning that often gets overlooked in the excitement of investing: the emergency fund. While investing is a fantastic way to grow your wealth, it’s crucial to build a solid financial foundation first. Let’s explore why having a sufficient emergency fund is key to  successful long-term financial planning.

Emergency Fund Picture

What is an Emergency Fund?

Simply, an emergency fund is a stash of money set aside to cover unexpected expenses. It is there to act as a financial safety net when a curveball gets thrown your way, and provides you with peace of mind knowing that you can meet these expenses without having to borrow money or drawdown from investments. Typically, we recommend that individuals hold between 3-6 months expenditure in a readily accessible cash account. This means that you can access your cash at anytime without penalty, providing you with maximum flexibility.

What are the Benefits?

Avoiding High Interest Debt

We have all been there before, just as you get some money, life gets in the way and all of a sudden you are forking out on unexpected expenses such as car repairs or children. However, by having rainy day money stashed away, you are able to avoid short term expensive credit and save yourself from the cycle of debt.


Avoiding Selling Investments

Furthermore, life is unpredictable, and unexpected expenses can arise at any time. Without a sufficient emergency fund, you may find yourself forced to sell investments at an inopportune time, which can lead to crystallising capital losses and missing out on long-term gains.

Capital Loss Image

Peace of Mind For Better Decision Making

Knowing that you have a financial safety net allows you to make investment decisions with a clear mind. It provides emotional stability, helping you stay focused on your long-term goals without being swayed by short-term financial challenges.

Once you’ve established a robust emergency fund, you can turn your attention to investing with confidence. Here’s how the two go hand-in-hand:

Strategic Asset Allocation:

With an emergency fund in place, you can allocate your investment portfolio with a long-term perspective. You won’t need to liquidate investments prematurely during market downturns to cover unexpected expenses, enabling you to ride out market fluctuations and potentially benefit from compounding over time.

Opportunity Ceasing:

Having a financial cushion empowers you to seize investment opportunities when they arise. Whether it’s a market dip or a promising investment option, you can confidently make decisions without the fear of jeopardizing your financial stability.


Building wealth is a journey, not a race. While the allure of quick investment returns may be tempting, it’s essential to prioritise the foundation – an emergency fund. By establishing this safety net, you’re not only protecting yourself from life’s uncertainties but also setting the stage for successful, stress-free investing. Remember, it’s not just about making money; it’s about making smart, sustainable financial choices that lead to lasting prosperity.

The Benefits of Financial Advice

Removing the Jargon

We have all been there before. You open your annual statement and you are instantly confronted with financial planning jargon. UFPLS this, Annuity that… Ultimately this leaves you feeling less in control of your finances, and this does not marry well with you achieving your financial objectives. At Lane Financial Management Ltd we understand the value of independent financial advice and are strong advocates of this. So apart from having someone to decode Jargon, what are the benefits of financial advice?

Financial Jargon

Objective Setting

Lets be honest, how often is it that you sit down and really take the time to think about your life and financial goals. I don’t know you from Adam, but I will take a guess and say probably not that often. As we all know, trying to navigate a ship without a heading doesn’t lead to good things. However, by sitting down with a financial adviser you will be encouraged to think about what it is you really want out of life. You will be encouraged to define your short and long term goals and this will give your ship its heading.

Avoiding Common Pitfalls

Despite thinking we are superhuman, unfortunately the majority of us are not. Life has enough plates to keep spinning without trying to keep up to date with the intricacies of the UK’s taxation system and macroeconomic conditions. Consequently, many individuals find themselves making common mistakes which can easily be fixed with the right guidance and financial oversight. Often we have conversations with clients that have not made an expression of wish for their pension. Now this is free and simple to do, but many individuals are unaware that an expression of wish not only tells the pension trustees who they wish to inherit their pension, but it can also keeps their pension outside of their estate for inheritance tax purposes. It is advice like this that can save huge amounts in tax and worry.

Financial Pitfall

Common pitfalls we come across include:

  • Ignoring budgeting: failing to stick to a budget is a common mistake which often leads to individuals living lives outside of their financial means and accumulating high interest unsecured debt.
  • Neglecting the emergency fund: not having an emergency fund leaves you vulnerable to unexpected expenses. Without a financial cushion you may have to rely on high interest credit to see you though.
  •  Overlooking insurance needs: failing to have adequate insurance coverage such as life, critical illness and income protection insurance can leave you financially exposed in the face of unexpected events.
  • Chasing short term gains: Investing without a clear strategy or chasing quick profits can lead to losses. It’s important to have a diversified and well-thought-out investment plan aligned with your financial goals.

Crisis Assistance

Without a doubt, having a hand to hold when markets crash or when a family member passes is invaluable. By working closely with a financial planner you are more likely to avoid knee jerk reactions when markets tumble and this often leads to greater returns over time. Not only this, a good financial planner is there to listen when times get tough and to reassure you that your financial plan remains on track.


In summary, by working closely with an independent financial adviser you benefit from objectivity, technical expertise, and reassurance when times get tough.

Can We Help?

Would you like to benefit from our independent financial advice?

Please get in touch by clicking on the following link Contact Us.

Russia Ukraine Market Commentary


Lane Financial Management Ltd Market Commentary

At times like these, after a market shock and subsequent sell-off, it is wholly understandable that investors feel on edge and start looking for the exit. However, experience tells us, and past evidence confirms it, that even the worst selloffs are usually followed by sustained periods of recovery. Across almost all-time spans, returns have recovered significantly over the following one, three, five or ten years after, meaning investors who managed to resist the urge to sell have (in most instances) seen their investments recover their losses and go on to perform very well. This demonstrates that after previous selloffs, investors with a longer time horizon are best placed to hold their ground and remain invested.

Tensions between Russia and the Ukraine had been building for several weeks and many countries imposed sanctions on Russia in a bid to dissuade it from invading. However, these proved futile as Russian president Vladimir Putin announced a “special military operation” against Ukraine. Since then, fighting on the ground has escalated while economic sanctions imposed on Russia by other countries have ramped up. There has also been an attempt by the US, Britain, the EU, and Canada to block Russia’s access to the Swift international banking payment system.

As investment professionals, it’s our responsibility to assess the potential impact on financial markets and the global economy. While we monitor the developments, the only thing that can be said with certainty is that no one knows what Putin will do, or the effect it will or won’t have on the market. In global market terms, we know from history that while geopolitical crises such as this one can roil markets, they usually don’t have longer-term consequences for investors. However, we do not underestimate the risks presented by Russia’s role as a global energy provider. Russia is the source of 10% of the world’s energy, and nearly 50% of the energy consumed in Europe, therefore the risks extend far beyond the borders of Russia and Ukraine, including higher energy prices and increased financial market volatility. Indeed, it’s fair to say that investment markets have already priced in significant levels of risk and consequence due to this factor.

As a result, funds solely invested in Russia, or those with large allocations, crashed to the bottom of February’s performance table. It was not just Russian funds that took a hit in February. All major European sectors were down at the end of the month due to their physical proximity to the crisis, with the IA European Smaller Companies sector making the second largest losses among Investment Association (IA) sectors, down 5.8%.

Oil and energy prices are inherently linked to Russia as it is one of the biggest suppliers globally. Even before political tensions began, the price of these assets had already been pushed up by inflation, although the Ukrainian crisis has overtaken this as the number one investor concern. As a result of increasing commodity prices and inflation spiking as a result will of course impact the base line cost of production and consequently profit lines of companies. This will have a negative impact upon all asset classes in the short term.

In times like these, we encourage investors to block out short term market noise and to focus their attention on the medium to long-term.

Economic and Market Outlook Summary For 2022

The Global Economy in 2022

The outlook for 2021 focused on the impact of Covid-19 health outcomes on economic and financial conditions. Our view was that economic growth would prove unusually strong, with the prospect of an “inflation scare” as growth picked up. As we come to the end of 2021, parts of the economy and markets are out of balance. Labour demand exceeds supply, financial conditions are exceptionally strong even when compared to improved fundamentals and policy accommodation remains extraordinary.

Although health outcomes will remain important in 2022, the outlook for macroeconomic policy will be more crucial as support and stimulus packages enacted to combat the pandemic-driven downturn are gradually removed into 2022. The removal of policy support poses a new challenge for policymakers and a new risk to financial markets.

The global economic recovery is likely to continue in 2022, although we expect the low-hanging fruit of rebounding activity to give way to slower growth, whether supply-chain challenges ease or not. In both the United States and the euro area, we expect growth to normalise lower to 4%. In the UK, we expect growth of about 5.5% and in China we expect growth to fall to about 5% given the real estate slowdown.

More importantly, labour markets will continue to tighten in 2022 given robust labour demand, even as growth decelerates. We anticipate several major economies, led by the US, will quickly approach full employment even with a modest pick-up in labour force participation. Wage growth should remain robust and wage inflation is likely to become more influential than headline inflation for the direction of interest rates in 2022.

Global Inflation

Inflation has continued to trend higher across most economies, driven by a combination of higher demand as pandemic restrictions were lifted and lower supply from global labour and input shortages. Although a return to 1970s-style inflation is not on the cards, we anticipate that supply/demand frictions will persist well into 2022 and keep inflation elevated across developed and emerging markets. That said, it is highly likely that inflation rates at the end of 2022 will be lower than at the beginning of the year given the unusual run-up in certain goods prices.

Although inflation should cool in 2022, its composition should be stickier. More persistent wage-based inflation should remain elevated, given our employment outlook, and will be the critical determinant in central banks’ adjustment of policy.

Global Policy

The global policy response to Covid-19 was impressive and effective. Moving into 2022, how will policymakers navigate an exit from exceptionally accommodative policy? The bounds of appropriate policy expanded during the pandemic, but it’s possible that not all these policies will be unwound as conditions normalise. On the fiscal side, government officials may need to trade off between higher spending—due to pandemic-driven policies—and more balanced budgets to ensure debt sustainability.

Central bankers will have to strike a delicate balance between keeping a lid on inflation expectations, given negative supply-side shocks, and supporting a return to pre-Covid employment levels. In the United States, that balance should involve the Federal Reserve (Fed) raising interest rates in 2022 to ensure that elevated wage inflation does not translate into more permanent core inflation. At present, we see the negative risks of too-easy policy accommodation outweighing the risks of raising short-term rates. Given conditions in the labour and financial markets, some are likely underestimating how high the Fed may ultimately need to raise rates this cycle.




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