How to fight the monster that eats your money
THE highest inflation rate for more than five years – at 3 per cent – is turning another screw on already squeezed family budgets.
With average pay rises at just 2.2 per cent it means householder spending power is falling behind.
The pressure will mount further on living standards if the first Bank of England base rate rise for a decade is applied next month, as predicted.
Inflation is the ‘silent threat’ that eats away at the real value of cash over time. It means the new 12-sided one pound coin is now worth less than a third of its 1983 ‘round’ design predecessor.
Alistair McQueen, head of savings and retirement at insurer Aviva, says: ‘One pound now has a relative purchasing power of only 31 pence.’
Follow our six-step plan to beating the impact of inflation:
1 SAVINGS
THE average easy access account pays just 0.42 per cent – seven times less than the new 3 per cent inflation rate as measured by the Consumer Prices Index. Some children’s accounts and interest-paying current accounts beat inflation, such as Nationwide Building Society’s at 5 per cent on balances of £2,500 (for a year only).
Anna Bowes, of research website Savings Champion, says: ‘There is no need for savers to put up with average rates. Someone switching £10,000 to the best paying savings rate from RCI Bank’s Freedom Account paying 1.3 per cent should earn £130 a year rather than just £42 from the average account.’
Index-linked savings certificates from National Savings & Investments have been a popular way to inflationproof savings. These pay 0.01 per cent plus the more rarely used but higher inflation measure of the Retail Prices Index – currently 3.9 per cent.
The certificates are not available to new savers but millions of existing holders have the option to roll over cer- tificates on maturity. Laith Khalaf, of broker Hargreaves Lansdown, says: ‘It is a nobrainer to hang on to them.’
2 INVESTMENTS
TO BEAT inflation consider diversifying assets. Andy Cowan, head of financial planning at wealth manager Tilney, says: ‘This means having a portfolio which includes equities.’
Figures from online wealth manager Wealthify suggest £100 a month saved over ten years would be worth £12,229 if saved in the average cash account. Invested in ‘medium-risk’ equities instead, this would grow to just under £16,200 if growing at 5.7 per cent a year.
A traditional starting place for many savers has been indexlinked gilts – loans issued by the British Government that include inflation protection. But these have lost their lustre.
Khalaf says: ‘Quantitative easing and relentless buying by pension funds to meet income guarantees for pensioners has pushed the prices of these gilts sky high.’
Gilts can be bought through a fund, such as the M&G UK Inflation Linked Corporate Bond fund. This also invests in inflation-linked bonds issued by companies.
Another option is to buy the shares of firms that pay strong and growing dividends. This can be done via an equity income fund. Khalaf likes Jupiter Income with a yield of 3.7 per cent.
More cautious investors might prefer a fund that mixes shares, bonds and cash to produce a return that beats inflation with fewer ups and downs than shares alone. One to consider is Newton Real Return. Cowan suggests considering investments in physical gold or infrastructure funds. The latter vehicles invest in the likes of toll roads which generate income with the provision for annual increases in line with inflation.
3 PENSIONS
THANKS to the ‘triple lock’, those receiving the state pension are guaranteed annual increases of the minimum of the Consumer Prices Index, average earnings or 2.5 per cent.
Their incomes will rise 3 per cent in April next year. But Steve Webb, director of policy at financial services company Royal London, suspects the Government will soon switch to a newer inflation measure which includes housing. This is usually about 0.2 percentage points lower.
Employees with defined benefit pensions, where pensions are based on salary and length of service, often enjoy index linking – a reason to hesitate in transferring their pot to a personal plan before retirement.
Webb says: ‘Having an inflation-linked pension looks valuable at times like this. Some people have their annual increases linked to the Retail Prices Index, which is even higher at 3.9 per cent.’
4 MORTGAGES
RAMPANT inflation in the 1970s produced one welcome side effect – the rapid erosion of the real value of home loans at a time when incomes were also rising rapidly. David Hollingworth of mortgage broker London & Country, says: ‘Today, disappointing wage growth means the debt burden is not reducing as it did then. But there is action borrowers can take, especially if they are on a lender’s standard variable rate – on average 4.5 per cent.’ Someone with a £150,000 repayment mortgage with 20 years left could switch to the best five-year fixed rate with Monmouthshire of 1.7 per cent and see payments fall to £738 – a saving of £211 a month.’
5 CREDIT CARDS
EVERYDAY purchases such as food, energy and petrol are getting more expensive – partly due to pressure on the pound and rising import costs in the wake of the Brexit vote.
Using credit cards with high interest rates will compound the problem so consider using a zero per cent card. Financial product scrutineer Moneyfacts points to Sainsbury’s, Halifax Online and AA cards as among the best.
6 HOUSEHOLD BILLS
IF you are on a fixed rate energy deal which is about to end, ensure you switch to avoid going on to a standard variable tariff.