How to protect your wealth as inflation hits a 10-year high

You may have already seen in the media that the Bank of England is under increasing pressure to raise interest rates as inflation continues to rise. According to the Office for National Statistics, inflation hit 5.1% in November 2021, putting it at a new 10-year high.

This could present savers with something of a dilemma, because inflation has the potential to devalue your money in real terms.

If you’ve not considered this, read on to discover how inflation might affect your wealth, and why investing could help preserve the long-term value of your cash. Before you do though, we need to understand how inflation works.

Inflation is the rise in the cost of goods and services

As inflation is the increase in the price of goods and services, it has the potential to affect everything from your utility bills to your weekly shop. A small amount of inflation typically signals a healthy economy, although if it’s too high and your money’s not keeping up, your cash will drop in value in real terms.

To show this, consider the following. The Office for National Statistics shows that at the end of December 2010 the average cost of a pint of lager was £2.99. Today that same pint of lager will cost £3.92, meaning the cost has risen 31% in 11 years.

If you use an inflation calculator it reveals that you need £137 today to have the same spending power as £100 in December 2010. This means your cash needed to grow 37% to keep pace with the average rate of inflation, which averaged 3% a year during the period – significantly below the BOE’s predicted inflation rate for 2022.

If it didn’t, your money will have reduced in value in real terms.

The expected interest rate rise may not inflation-proof your wealth

Historically, interest rates have risen as inflation increases, as they are one method the central bank can use to help control the spiralling cost of living. As one of the drivers of inflation can be demand, higher interest rates can make saving a better option than spending, meaning demand drops.

Inflation started to rise during 2021 as Britain got back on its feet economically, sparking speculation that interest rates would follow. While this may sound like welcome news, you may want to consider an article in the Times that suggests interest rates could reach 1% by the end of 2022.

If they do, the rates being offered for savings accounts may still be significantly below the rate of inflation.

Investments could inflation-proof your money

Research has shown that investments could provide better growth potential over the long term. For example, the Barclays Gilt Study of 2019 shows that investing your money into stocks and shares typically provides greater long-term growth than cash savings.

The study tracked the nominal performance of £100 invested in cash, bonds, and equities between 1899 and 2019. It found that £100 in cash savings would have been worth just over £20,000 in 2019, which sounds impressive until you realise it would have been worth around £2.7 million if invested in stocks and shares.

This suggests that investing your money may expose it to greater growth potential, which could help inflation-proof your wealth. That said, investing should not be entered lightly and should always be seen as a long-term venture.

Remember, you may receive less than you invested depending on when you decide to access your investments.

A Stocks and Shares ISA could be a good option

If investing to inflation-proof your money sounds like a good option, you may want to consider a Stocks and Shares ISA. These accounts are tax-efficient and could provide greater growth potential than their cash equivalents.

Any growth your investments enjoy will not be subject to Capital Gains Tax, and any withdrawal you make will typically be free of Income Tax.

As moving your cash into stocks and shares increases the amount of risk your money is exposed to, always speak to a financial adviser before going ahead. They can confirm the levels of risk involved, the growth potential of the funds you’re considering, and any charges you may incur.

In the 2021/22 tax year, you can put up to £20,000 into an ISA, which can be paid into one account or split over different ones. This means you could build a substantial tax-efficient investment relatively quickly.

Remember that, if you don’t use all of your ISA allowance, you lose the unused amount at the end of the tax year.

Get in touch

If you would like to speak to us about inflation-proofing your wealth, please email or call us on 01904 655 330.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

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.

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