Currently a question that many of our clients are asking is, how can I plan my income when inflation is rising?
We work with many clients at the point of retirement, helping them choose the right investments for their next stage in life. We are also pleased to work with those people as they start the next phase of their lives, helping them manage their investments to ensure they can fund the lifestyle they have always dreamed of in retirement. The impact on inflation is something they are aware of and concerned about.
What is inflation?
Inflation is the rate at which the cost of everyday things like food, transport and electricity increase over time. The Bank of England tracks inflation using the Consumer Price Index, which monitors the prices of hundreds of goods and services. In the latest government figures, the Consumer Price Index rose by 9.4% in the 12 months to June 2022. This is the highest rate for 30 years, and is climbing month on month.
The impact of inflation
The impact of inflation means that your money is worth less over time. For our retired clients, this can be a cause for concern. While they are economically active they may earn more money, through higher salaries or growing their business. Once they are no longer earning a salary, their income tends to come from investments. This means they have a fixed income which is worth less as prices rise.
However the Bank of England has responded to inflation by increasing interest rates, and clients with significant investments will see benefits from this move.
Pensions and inflation
If you are not yet at retirement age, one way of protecting yourself against inflation is to invest your money in a pension. Because these are invested in the stock market and are often long term investments, they tend to grow, despite the short term fluctuations of the market. Between 2015 and 2019, pension funds grew by an average of 7.4% per year – much higher than the average 1.53% inflation over the same period. If you have many years before retirement, it is likely that your final pension pot may be unaffected by the current inflation rate.
What can clients do?
In summary, you may not be able to completely protect your pension and investments against the impact of inflation. But the impact of that on your lifestyle will depend on many factors.
It may be helpful to carry out a full review of your outgoings, to ensure you are budgeting to allow for increases in day to day costs without increases in your pension payments.
Our general advice is always to be aware of the specific terms of your pensions and investments with regards to inflation. This means you can take action based on your own specific circumstances rather than being concerned about headlines. If you would like a review of your current pension to understand the implications of the current inflation rate, please get in touch.
For clients due to retire this year, we can also look at the pros and cons of taking some of your pension as cash, buying an annuity or investing to get a regular income.
Because financial health is financial wealth.
To book an appointment to talk to us about your financial health, call us on 01332 913006