18 January 2023
If you are covering the latest UK inflation data and how it impacts personal finance, please see the following comment from Rio Stedford, financial planning expert at Quilter:
"The Bank of England’s successive interest rate rises have attempted to tame runaway inflation over the last few months and while today’s inflation figures show a small decrease, people’s buying power has taken a real hit and it is likely to take some time to come down. However, on average forecasts expect inflation to be around 2% by the end of next year."
"Inflation can have a negative impact on people's money by decreasing its purchasing power. When the rate of inflation is high, the value of money decreases, and it takes more money to buy the same goods or services. This means that people must spend more money just to maintain their standard of living, and they may not be able to afford as much as they could before. This is how inflation impacts a variety of personal finance issues:
Pensions
"Inflation can have a devasting impact on a retirement pot and could seriously change your retirement plans at very short notice with people choosing to work longer and delay retirement. However, it is often the forgotten risk that can hide in plain sight.
"If inflation remains around 10%, your purchasing power is very quickly eroded if your money is held in cash. So, while the state pension will, at the very least, keep up with inflation through the triple lock, your private savings will not unless you do something about it. Historically, the best way to beat inflation is by keeping money invested in the stock market but this also carries risk. Choosing well diversified and risk appropriate investments is key for those nearing or in retirement particularly with the spectre of inflation looming down.
"However, those who have a defined benefit pension may see their pension payments increase in line with inflation but many DB schemes impose a cap. Checking with your particular scheme is key if you have this type of pension."
Savings
"Saving rates in isolation don’t mean anything, to get the full picture they must be tested against the current rate of inflation and if that is even close to double figures it’s unlikely even the best savings account will deliver anything other than a real terms loss."
"It’s easy for heads to be turned by very attractive cash savings rates but in reality it’s one of the worst times ever to be in cash. Superficially the headline savings rates have increased but the gulf between the Consumer Price Index and the Bank of England base rate means that people’s cash is decaying at an alarming rate."
Annuities
"The appeal for annuities declined due to low rates over the past few years but there are signs they are becoming more popular again due to the current interest rate rises spurred on by rising inflation. However, those who have already purchased an annuity would not benefit from a further rate increase as they are tied in. There are lots of different types of annuities with one of them called an inflation-linked annuity where the income a pensioner receives will keep up with inflation. Getting advice and shopping around is key if this is something that is attractive to you as once its purchased there is no going back."
Household budgets
"One of the consequences of inflation remaining high is the prospect of the Bank of England further increasing interest rates and the knock-on impact on mortgages. The FCA estimate that 750,000 people are currently at risk of defaulting on their mortgage due to their monthly costs spiralling and many millions more will be feeling the pain. This is all on top of food cost increasing as supermarkets and shops pass on increased prices to customers. Ultimately, this squeezes household budgets in a way many will have not experienced before. If possible it is a good idea to try and build up an emergency fund which is around three to six months of your expenses in these kinds of circumstances as this can help with any unexpected costs like a new boiler or car that might make someone spiral into debt. Similarly, this can help you stay financially afloat if you were to lose your job. Ultimately, many households in the UK are having to adjust their spending habits due to high inflation at the moment."
