The news headlines have been dominated by stories about high inflation and rising living costs in the last few years.

According to the Office for National Statistics (ONS), inflation reached 11.1% in the 12 months to October 2022. These exceptionally high levels of inflation likely caused concern among your clients, and many of them may have noticed an effect on their financial plan.

Fortunately, despite some small fluctuations, the overall rate of inflation has fallen since then and the most recent figures from the ONS show that it was 4% in the 12 months to December 2023.

However, it’s important to note that 4% is still double the Bank of England (BoE) target of 2%. And even when inflation is at 2% or less, it is still a concern because it could affect your clients’ wealth.

Inflation could erode the real terms value of your clients’ wealth

The levels of inflation we have seen in recent years are uncharacteristic, and the BoE put measures in place to control it.

However, many people consider inflation to be a natural function of the economy and believe that a small amount of inflation is necessary. This is why the BoE aims to keep inflation at around 2%.

As such, inflation is not likely to go away altogether, and over time it may affect the real terms value of your clients’ wealth.

For example, if they have £1,000, they can buy a certain amount of goods and services with that money. 

If inflation is 4%, it would cost them £1,040 to buy the same goods and services the following year.

Yet, if their wealth was in a savings account with an interest rate of 2%, they would only have £1,020. That means they can’t buy as much as they could a year before and their wealth has effectively lost value in real terms.

This could be especially problematic during a period of high inflation similar to what we’ve seen in recent years because interest rates may not keep pace with inflation.

However, even if they have a favourable interest rate on their savings, inflation could still dampen their growth. As a result, it might be harder for your clients to reach their financial goals. 

Fortunately, working with a financial planner could help your clients protect their wealth from inflation in several ways.

1. Explaining the effects of inflation

Often, clients fail to take the necessary steps to protect themselves from inflation because they don’t understand the effect that it has on their wealth in the first place.

According to a study from Aviva, only 44% of people surveyed correctly understood the effect that inflation had on their savings.

A financial planner can explain how inflation could erode their wealth over time, and how achieving more growth could help them combat this. 

This understanding is crucial in encouraging clients to be more proactive with their wealth instead of leaving it in a savings account where it could potentially lose value.

2. Factoring inflation into their retirement plans

Inflation could have a significant impact on your clients’ retirement as it may affect the value of their savings and increase their living costs.

Unfortunately, a survey reported by FTAdviser found that 51% of respondents had not factored inflation in when making financial plans for the future.

If your clients fall into this trap, they may miscalculate the real-terms growth that they are likely to see on their savings and overestimate how much they will have when they retire. Additionally, they might underestimate what their living costs will be if they base their calculations on current prices without considering inflation.

We can use cashflow forecasts to predict how prices could change in the future, and what effect inflation might have on your clients’ retirement savings. 

Using this information, we can create an accurate financial plan that takes inflation into account, making it more likely that your clients can still achieve their desired lifestyle in retirement.

3. Exploring alternatives to cash

Holding too much of their wealth in cash could cause issues for your clients as inflation may erode the value of their savings. Conversely, if they invest their wealth over a long period, they might achieve growth that beats inflation.

While investing does carry some risk, historical data shows that it typically generates more growth than cash savings. 

The following graph from Nutmeg compares cash savings growth and the rate of inflation with the performance of a 60:40 multi-asset portfolio – 60% equities and 40% fixed-income investments –  and an investment in the global equity markets. It assumes the same initial investment and measures growth between January 2010 and July 2023.

Source: Nutmeg

As you can see, despite some short-term fluctuations, both investment portfolios outperformed cash and beat the rate of inflation.

We can help your clients explore different investment options and create a portfolio that suits their goals and attitude to risk, so they can potentially achieve long-term growth. Additionally, we can offer support and reassurance during periods of market volatility when they may be tempted to sell investments.

Ultimately, this means that their wealth may be more likely to outpace inflation and achieve meaningful growth over the long term.

Get in touch

If your clients are concerned about the effect of inflation on their wealth, we are here to support them.

They can contact us at hello@ardentuk.com or call 01904 655 330. As an award-winning financial advice company that was a 2022 VouchedFor Top Rated firm, you can be sure that we’re a bona fide company providing excellent advice and high-quality service.

Please note

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

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results. 

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.  

The value of your investments (and any income from them) 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. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

The Financial Conduct Authority does not regulate cashflow planning.