Last week was a good week for investors, with most major markets posting positive numbers.

This included the FTSE 100, which grew 3.1%, as it reached record highs.

A number of factors supported this rise, including a slight fall in December’s UK inflation numbers. Although a drop from 2.6% to 2.5% may not sound like a big change, the headline figure hid a larger fall in services inflation. Services inflation – which includes hotels and travel – proved persistent for most of last year. However, in December, inflation in the sector fell from 4.9% to 4.4%, beating expectations. It should be noted this figure included a sizable drop in airfare prices, which are notoriously fickle, so some of this drop might be temporary.

In addition, UK GDP figures for November released last week showed 0.1% growth. After a strong start to 2024, the UK economy struggled for growth as the year progressed. In fact, at the end of November, UK GDP was smaller than it was in May.

Commenting on these numbers, Hetal Mehta, Head of Economic Research, said: “The November 2024 GDP data are the first positive growth print since August, but only just. The UK economy has grown by a mere 1.8% over the past three years; after the initial post-pandemic recovery the trend has been much flatter relative to the 2014-2019 period. Consumers are cautious, as evidenced by the upward trend in the savings ratio and weaker business sentiment. Overall, this paints a picture of stagflation.”

Subsequently, the Bank of England (BoE) is expected to gradually reduce interest rates this year, including a potential cut next month. However, Hetal notes: “The monetary policy response is not straightforward as it is the supply-side policies that are needed to help the economy out of this situation. In the short term, there is enough progress on inflation to allow the BoE to keep cutting interest rates gradually.”

On the supply-side, Rachel Reeves is expected to face some difficult decisions, with limited options to try and generate growth in the coming months. In March, she’ll deliver her Spring Statement, which is likely to show that most, if not all, of the fiscal headroom she gave herself in the last Budget is now gone.

UK equity performance was further helped by a weaker pound relative to the US dollar. The majority of earnings for companies in the FTSE come from abroad, and so a weaker pound means these companies will record high sterling revenues and profits. A cheaper pound also makes domestic share prices more attractive for overseas investors, another factor for the market optimism last week.

The positive momentum was seen in a number of markets. In the EU, the European Central Bank (ECB) also appears to be on course to gradual interest rate cuts, barring any economic shock, which helped lift the MSCI Europe ex. UK up 3.1%.

Moving to Asia, Chinese equities concluded the week in positive territory, the Shanghai Composite rising by 2.3% (local currency) on the back of better-than-expected GDP data.

In the US, the S&P 500 climbed 2.9%, on the back of encouraging inflation figures and some strong corporate results. The US faces some uncertainty at the moment, with Donald Trump’s inauguration today. Republican voters will be hoping he hits the ground running, and Trump has revealed plans to make extensive use of executive orders to quickly push through a raft of changes in areas including immigrations and environmental regulation.

Last year’s Budget moved the goalposts for those with long-term financial plans in place. Chancellor Rachel Reeves called it a Budget to fund investment, to fuel growth and fill a £22 billion-pound black hole in the public finances. One of the ways she looked to fund this was through pensions.

Traditionally, your pensions would be the last thing that you would touch, after drawing down on savings and ISAs. Using your savings, would reduce the overall taxable value of your estate, while preserving the pension to pass to future generations without being liable to 40% inheritance tax.

This is currently under discussion and may change from 6 April 2027. While you can still draw down 25% of your pension as a tax-free lump sum (up to £268,275), any unspent pension will potentially be counted – and taxed – as part of your estate when you die from 2027.

The Budget has left thousands wondering whether to draw their pension, take the hit on income tax but then be able to gift some of the money to loved ones.

What you could do

• Use your annual £3,000 IHT gifting exemption (£6,000 for a couple) to give money to family or loved ones during your lifetime, instead of as an inheritance. This will reduce the size of your estate over time.
• Make a gift of over £3,000. If, however, you die within 7 years of making the gift, it will be counted as part of your estate.
• Make regular monthly ‘gifts’ to family members, or cover some of their outgoings, such as childcare or school fees on a regular basis. These are tax free – so long as they’re genuinely made from disposable income and do not affect your own standard of living.
• Consider spending more of your pension pot on yourself, or others.
• Take out a Lifetime Assurance policy to help cover the eventual IHT bill.

Another route to consider is to accept your IHT liability but protect your family by planning for it. You could, if you have the disposable income, take out a whole of life insurance policy to cover off the anticipated bill. These policies last for your whole lifetime and pay out a tax-free lump sum to your family when you die. This lump sum can be used to pay the IHT. It can provide peace of mind for everyone, as well as a comforting sum of money. You would need to be sure you’d be able to afford these payments to the end of your life.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

“Starting tomorrow, I will act with historic speed and strength and fix every single crisis facing our country.”

Speaking on Sunday, Donald Trump promises to hit the ground running for his second term as President.