Last month, the Bank of England (BoE) revealed that the UK economy was set for its largest period of growth since the second world war.

The BoE raised its estimate for UK GDP growth to 7.25% for this year. While governor Andrew Bailey acknowledged this was “very strong, good news”, he remained cautious too, noting that two years’ worth of growth had already been lost to the pandemic.

The 7% rise comes off the back of a near-10% drop in 2020, the worst decline for almost 300 years.

As restrictions lift and consumers return to city centre spending, stronger economic growth has led to a rise in inflation above the UK’s 2% target.

The BBC reported a doubling of inflation in April 2021, jumping to 1.5% from just 0.7% in March. Figures for May confirm it currently stands at 2.1%.

With the BoE’s chief economist warning of a possible “inflation tiger”, what would this mean for your clients’ money? And how can Boolers help them shield their wealth from its effects?

Inflation decreases the buying power of your clients’ money

Inflation above the BoE’s target of 2% was predicted, and is expected to be temporary, brought about by UK consumers taking advantage of an easing of restrictions to spend an estimated £150 billion of lockdown savings.

Source: The Guardian

The sharp rise has been put down to the rising cost of footwear and clothing, as well as a surge in oil prices and household gas and electricity bills.

What does a rise in inflation mean for the value of your clients’ savings and investments?

Savings rates are currently at a historic low

Savings rates have been low since the global financial crisis in 2008. The coronavirus pandemic has also taken its toll – the BoE reduced its base rate twice in March 2020 as the extent of the Covid-19 outbreak became clear.

When interest rates are below inflation, your clients’ savings are effectively losing value in real terms. They might consider a move into investment.

Despite previous economic downturns resulting from the coronavirus pandemic, the global financial crisis, and many other periods of short-term volatility, the general trend of the market is upward.

Last year, online trading provider IG found that over the 10 years to 2019, the total return for the FTSE 100 was +103.98% with dividends reinvested – or a 7.38% annualised return.

We can also see that despite its worst fall in 30 years at the onset of the pandemic, the index recently topped 7,000, a return to pre-pandemic levels.

Source: London Stock Exchange

Although markets can rise as well as fall, with interest rates below inflation, the biggest risk for your client’s money might be not taking enough risk, or any risk at all.

Rising inflation devalues your clients’ pension pots

Rising inflation diminishes the spending power of your clients’ retirement pot. It can also put added pressure on retirement decisions, like how and when to take withdrawals.

At Boolers, we can help your clients to make the right decisions for them.

That might mean an annuity that rises each year to help combat inflation. This will lower the yearly amount they receive at outset but make long-term budgeting easier.

We can also help your clients manage their flexible pension withdrawals. Understanding the optimum percentage to take as income, and withdrawing only that amount, will prevent the excess sitting in your clients’ savings account where it could effectively depreciate when measured against inflation.

By taking a holistic view of their overall financial position we can help your clients live their desired lifestyle in retirement without fear that they will run out of money, and whatever the wider UK economy throws at them.

Interest rates could increase to limit the impact of rapidly rising inflation

The BBC reports that while April and May’s inflation rises had been predicted, there are concerns among economists that soaring inflation could lead to a rise in interest rates at the central banks.

While this is a possibility, the BoE’s monetary policy committee (MPC) recently voted unanimously to keep interest rates at 0.1%.

This is partly because the rise in inflation is expected to be temporary, but also because of the impact of coronavirus on the economy. While the vaccine rollout is progressing, uncertainty surrounding new variants and the full removal of restrictions later this month means that it might be too early to act.

Get in touch

While the economic forecast from the BoE is optimistic, it is cautious too. If you have clients who are worried about the impact of rising inflation on their long-term financial plans, please get in touch. Email or call 0116 240 7070.

Please note

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.