Mitigating the long-term effect of inflation on your finances

 

With continuing inflation in the UK, many of us and our businesses have been put “off track” in the short to medium term so how do you mitigate the long-term effect of inflation?

The Bank of England recently increased interest rates by a quarter of a percentage point to 4.25%. This is despite the turmoil that has engulfed banking in recent weeks.

Andrew Bailey, the Bank of England governor, said last week that recent financial turmoil would not stand in the way of the central bank controlling inflation with higher interest rates.

Inflation is a problem for most of us. Savers find that the value of their cash is being rapidly eroded. At 10% inflation, the £100 you save today will only buy £90 worth of goods in a year’s time. Many people find that their household budgets are stressed.

Businesses impacted by high inflation must keep a watchful eye on their cash-flow.  If you are having problems paying your bills don’t wait.  Get in touch with us promptly.

So how about your personal finances? What can you do to protect your long-term finances and combat inflation? Here’s a few pointers:

  1. Protect your retirement income

Inflation has an enormous impact on how long retirement savings will last. The income that seems more than adequate when your start your golden years can look less than generous after 10 years of inflation, and a recipe for misery after 20.

A basic level annuity will mean having the buying power of your income eroded every year. An inflation-linked annuity will start off providing a much smaller income, but one that keeps increasing over time.

A drawdown pension – where your pension pot remains invested, and you draw down an income as you need it – is more flexible, but you will still need to take care to avoid running out of cash.

  1. Avoid locking your cash savings away

Savers should benefit when higher inflation leads to the Bank of England increasing the Bank Rate. But beware although the rates offered by savings providers are rising, they have not yet done so enough to come anywhere near inflation.

However, with the Bank Rate forecast to rise further and with savings deals forecast to follow, there could be better deals to be had over the next few months. Shop around for the best deal and avoid locking your savings into a long-term deal, because it could mean missing out on much better rates in the near future.

  1. Look at your investment strategy

In an inflationary world, investing – where your cash is used to buy something which could appreciate in price – could be more rewarding than saving.

While inflation erodes the value of cash savings, it works to boost the value of some investments. But how should you invest? Bond investment becomes less attractive in times of inflation, as the income provided by bonds is subject to inflation.

Investments in a diversified portfolio could mean you spread your risks.  Don’t put all your eggs in one basket.

If you have large amounts to invest it is almost always better to seek investment advice from a qualified professional.  If you don’t know a suitable wealth manager, we do so get in touch.

  1. Secure a low-rate mortgage before rates rise

Inflation has already triggered rate rises, and mortgages are substantially more expensive than they were last year.

This process could continue because the Bank of England has hinted as much. To avoid increasing interest costs which could mean that buying your home becomes difficult or even impossible, it makes sense to try and secure the lowest rate you can for your mortgage, fixed for the longest possible period.

If you are struggling with your mortgage repayments and can’t get back on track, it’s important you don’t ignore the problem.

There’s a lot of help available. Money Helper has a 5-step guide and a budget planner to help manage your money. See: Mortgage arrears or problems paying your mortgage | MoneyHelper

 

We always talk about businesses keeping a closer eye on your cash flow but the same applies to your personal money.  It is common sense but make sure you know what is coming and what you can afford to spend.  It is critical to review your family budget more often during inflationary times.

We are here to help.  Please talk to your normal manager if you need any other help.