Published

Inflation has not been one of the main topics of conversation in our client meetings for many years, but we, along with many other commentators, believe it may be more prominent in the future.

Anyone who lived through the early 1970s appreciates that periods of high inflation can be very scary, but to debtors who saw the real value of their mortgage debt fall dramatically, high inflation was seen as a positive (at least to those who could keep up with payments). The opposite is of course true for savers, for whom inflation erodes the spending power of cash in the bank.

Inflation informs the financial plans that Punter Southall Wealth’s Financial Planners craft in many ways, one of the most obvious being that we need to account for the risk of it eroding the value of our clients’ cash holdings, particularly over the medium to long term.

Additionally, although pension income from defined benefit (final salary) schemes and annuities is often linked to inflation, this is not always the case, so any credible analysis of an individual or family’s future spending needs must take into account possible variations in the rate of inflation over time.

Underestimating the erosive effect of inflation in forecasting future life and planning scenarios makes it more likely that savers and investors could fail to meet their goals.

Forecasting our clients’ income and expenditure, and how inflation might affect one and therefore the other, can be useful in helping our clients understand the extent to which their goals are realistic, and what they might consider doing in order to achieve them. This is why, at Punter Southall Wealth, our aim has always been to achieve above inflation returns, maintaining the real spending power of our clients’ assets. In the current environment this is more important than ever.

Another key aspect we consider on behalf of our clients is longevity risk, which is the risk that we outlive our retirement funds. A 65-year-old man has a one-in-four chance of living to age 92, while a 65-year-old woman has a one-in-four chance of living to age 94. Both have a one-in-ten chance of reaching age 98 (source: Office for National Statistics (ONS)). As a threat to the long-term sustainability of our clients’ lifestyles, inflation is most pernicious over the longer term due to the effect of compounding.

Also worth considering is that while the ONS publishes headline inflation figures, Financial Planners also need to consider the ways in which inflation affects clients of different ages and circumstances; some may feel the burden of inflation more heavily than others. For example, those who are paying nursing home or care fees are finding them rising faster than the UK rate of inflation.

In short, any assumptions around inflation need to be realistic; that is why our annual reviews take account of changing circumstances and shifting priorities as our clients get older. Such reappraisals are a key feature of the ongoing service that Punter Southall Wealth’s Financial Planners provide.

Planned rate changes to the Treasury backed range of National Savings & Investments products

It was announced on Monday this week that National Savings & Investments (NS&I) will be reducing the interest rates on many of their products (see below table). This includes a reduction in prize fund for Premium Bonds, which will now be calculated using a prize fund rate of 1% rather than 1.40%. These changes come into effect from November 24th 2020 and will affect personally held accounts and accounts held by pension fund trustees.

Details of the reductions can be found below:

Product Existing rate New rate
Premium Bond 1.40% 1.00%
Income Bond 1.16% 0.01%
Direct ISA 0.90% 0.10%
Direct Saver 1.00% 0.15%
Investment Account 0.80% 0.01%
Junior ISA 3.25% 1.50%

Source: NS&I website (Gross Interest rates – Annual Equivalent Rate)

This is a blow for savers where cash rates were very low anyway (and will likely continue to be low for some time), and where cash returns now make even less of an impression against the rising effects of inflation.

If this affects you and you would like to discuss what you can do, please make contact with your usual Financial Planner. If you do not have a Financial Planner and would like to discuss this with one of our Financial Planners, please get in touch.

Henry Denne, Head of Financial Planning

 

Disclaimer
This communication is prepared for general circulation and is intended to provide information only. It is not intended to be construed as a solicitation for the sale of any particular investment or as investment advice and does not have regard to the specific investment objectives, financial situation, and particular needs of any person to whom it is presented. Tax treatment will depend upon individual circumstances and may be subject to change in the future.

Please also note that the value of investments, and / or the income from them, can fall as well as rise so you could get back less than you invested. The past performance of an investment should not be relied upon as a guide to its future performance. Unless indicated otherwise, comment and opinion in this publication is based on HMRC’s tax regulations for 2020/21 tax year and future proposals.

This communication has been approved and issued by Punter Southall Wealth.

©2020 Punter Southall Wealth is a trading name of Punter Southall Wealth Limited, which is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No. 5374633. FCA Registration No. 478840. Registered office: 11 Strand, London WC2N 5HR. A Punter Southall Company.