Q. I have heard that it is possible that inflation will become negative in future and this could be a bad thing. Can you explain why it is not good for things to become cheaper?
A. Deflation is the term for the opposition of inflation, and relates to prices becoming lower year on year. Based on the measure of Consumer Price Inflation, this has fallen to 0.5%, which is not quite negative yet, but it is below the government target of 2%, and prices in Europe are falling slightly. Economists generally regard this as a bad thing, because it tends to go hand in hand with minimal or negative economic growth, such as Japan has experienced for much of the last 20 years. If declining prices are widespread, the danger is that consumers do not spend and businesses do not invest. If goods and services will be cheaper tomorrow than they are today, why not wait? The driving force behind the falling inflation we have currently is the reduction in the price of energy, food and in particular petrol. Once this is stripped out, underlying inflation is 1.3% rather than 0.5%. Food and petrol are not the sort of purchases one puts off for very long, so this should not affect people’s behaviour too negatively. In fact, the reduction in petrol prices so far has been likened to a 1% reduction in income tax, giving most people more money to spend which should have a beneficial effect on the economy rather than a negative one. For now therefore the low level of inflation should be a positive.
Q. I am a pensioner with money invested in Premium Bonds that seem to pay me next to nothing so am I better switching to the new National Savings over 65 Bonds?
A. Well that really depends. First of all any prizes you receive from your Premium Bonds are tax free, whereas any interest from the National Savings Bonds are taxable. For example the new 1 year Bond pays 2.8% gross (2.24% net for basic rate tax payer) and the 3 year Bond 4% gross (3.2% net for a basic rate taxpayer). These rates are both better than the average pay out from Premium Bonds of about 1.5% but you always have the chance of that £1 million prize from Premium Bonds?
Q. My mother recently died and left her estate between myself and my sister. I do not really need the money, and would prefer it to pass directly to my children, who are struggling to get on the housing ladder. I would rather they had these funds now as my house and savings will attract inheritance tax when I die so my mother’s legacy would be in addition.
A. It is possible to elect a Deed of Variation to your mother’s will within 2 years of her death. This effectively changes the terms of the will, meaning that for inheritance tax and possibly capital gains tax purposes it is as though your mother had left the money as you are varying it. Without such a deed, if you receive the money then pass it on, you are making a gift and the funds could count towards your estate if you die in the next seven years. The Deed of Variation would achieve the desired effect and keep the funds out of your estate. I recommend you consult a solicitor who is a member of STEP, the Society of Trustee and Estates Practitioners, who will be able to arrange this for you.
If you have a question you would like Trevor to answer, please email it to: yourmoney@rwpfg.co.uk or post it to Your Money, Rutherford Wilkinson Ltd, Northumbria House, 21-23 Brenkley Way, Blezard Business Park, Newcastle upon Tyne, NE13 6DS.
0191 217 3340
