High inflation is your clients’ #1 concern – here’s how financial planning can help

small business owners calculating finances

In the last couple of years, the UK’s high inflation rate has never been far from the headlines.

As of June 2023, the Office for National Statistics (ONS) reports that the UK inflation rate stands at 7.9%, meaning that goods and services cost, on average, 7.9% more than they did 12 months ago.

And, despite the Bank of England (BoE) raising the base rate on 13 consecutive occasions in an attempt to hit their 2% inflation target, the UK rate remains stubbornly high.

As the cost of living crisis persists, it’s perhaps no surprise that Canada Life report that 4 in 5 (83%) financial advisers cite inflation as the number one concern for their clients in 2023.

Clients are more concerned about inflation than the value of their portfolio, Dividend and Capital Gains Tax changes, and fears of a recession.

High inflation can reduce the value of a client’s wealth in real terms

Your clients have most likely felt the effects of high inflation in areas such as their energy bills, or the cost of a weekly shop. The ONS report that food and non-alcoholic drinks rose in price by an eye-watering 17.4% in the year to June 2023, with many essentials rising in price even more than that.

Another pernicious way in which inflation can damage a client’s wealth is that it can reduce the value of their savings in real terms.

Simply, if the interest they are receiving on their savings is not as high as the inflation rate, their spending power will be reduced in real terms. In other words, their money can’t buy the same goods and services as it could before.

Research by Standard Life clearly outlines the negative impact of sustained inflation.

For example, £10,000 in savings earning 3% in interest would drop in buying power to just £8,593 after a two-year period of 10% inflation.

In contrast, if inflation was 2% – the BoE’s target level – after two years its purchasing power would be £10,189.

The table below shows the real value of £10,000 in savings assuming an interest rate of 3% at various annual inflation rates.

Source: Standard Life

As you can see, two years of inflation at the current level of around 8% would see the value of a client’s £10,000 savings reduce to £8,979 in just two years, even if they were achieving an interest rate of 3%.

3 simple ways your clients can deal with inflation

There are many steps your clients can take now to inflation-proof their finances. Here are three.

1. Revisit their budget

A useful first step is for clients to revisit their essential and discretionary spending. If their bills have gone up across the board, it may be important to revisit their regular commitments to ensure they can continue to make the necessary levels of savings and pension contributions.

It’s a good opportunity to cancel all those direct debits for services a client never uses, and to think carefully about where their money goes.

2. Shop around for savings rates

While banks and building societies have increased the cost of mortgages in recent months, interest rates on savings accounts have not risen at the same pace.

Indeed, Harriett Baldwin, chair of the Treasury Select Committee, told the BBC that the committee had been putting pressure on banks to improve their savings rates all year. She said: “We’re quite sure these rates are measly and that the banks are not treating our constituents fairly”.

Chancellor Jeremy Hunt says it is an “issue which needs solving”, at a time when many households are struggling with the soaring cost of living.

If your clients have cash savings, it’s important that they regularly shop around to ensure they are getting the best return on their money. Even improving the rate of interest by 2% on £50,000 of savings would generate an additional £1,000 a year in interest.

3. Don’t hold too much cash

Most clients will need to hold some cash savings as part of their portfolio. This might be as an emergency fund, or because they plan to retire in the next few years and want to keep a cash buffer.

However, holding too much cash can hinder their progress towards their financial goals. Instead of holding large sums in cash, investing can provide the potential for growth that beats inflation.

Indeed, historical data reported by IG shows that the annualised returns on UK shares were 4.9% higher than the rate of inflation in the last 119 years.

Of course, the value of an investment can go down as well as up and a client may not get back the full amount they invested. Past performance is not a reliable indicator of future performance.

However, a well-diversified investment portfolio invested in line with a client’s tolerance for risk and time horizon can give them the potential for inflation-beating returns.

Get in touch

If you have clients who are concerned about inflation and would like to review their financial plan, we can help. We work closely with many professionals to provide independent, Chartered advice designed to help clients to achieve their short-, medium-, and long-term goals.

To find out more, or if you’re interested in working more closely with us, email or call 01454 416653.

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

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

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