Prepare for impact rising cost of living has in store
With the UK experiencing the highest inflation in decades and a possible recession on the horizon, many will turn to savings to relieve financial pressure – but without tailored advice, from experts such as Chiene + Tait Financial Planning, there may be long-term negative repercussions, writes
Right now, we are seeing clients dipping rather heavily into their investments and savings
TUK is currently heading into a period of inflation that no one under 40 has experienced in their lifetimes. In fact, it would probably be reasonable to extend this age range to anyone under 50. The soaring food and energy prices we’re seeing now will be a shock even to those who were born in the high inflationary era of the late 1970s when inflation was last running at eight per cent.
The inflation predictions made by bodies such as the Bank of England, the Office of Budgetary Responsibility and the Office of National Statistics, have continued to climb quarter on quarter. It was announced earlier this week that inflation had reached 9%, almost double the rate the Bank of England expected only six months ago. Furthermore, there are warnings that 10% is not out of the question in the short term.
Inflation could actually go way higher than that. With much of Europe dependent on Russian energy, the price of gas jumped by 50% when Russia invaded Ukraine. At the same time, Russia and Ukraine are two of the top five exporters of grain and fertiliser, so the war is already having a profound impact on the price of food such as bread. There have already been food riots in several countries.
All of this presents some severe challenges to anyone trying to save for the future. As George Jefferies, a financial planning expert at wealth managers Chiene + Tait Financial Planning, notes, in these difficult times, well-thought-through, bespoke financial advice can make a huge difference to people’s present and future circumstances. “The cost-of-living crisis we are currently experiencing here in Scotland, and across the UK generally, has impacted everyone. There is no hiding from it,” he comments.
One of the immediate challenges his clients are facing as a direct result of the current pressure on their disposable income is what to do about such savings as they do have.
“Obviously, when people face money pressures they turn to their savings. Which savings you choose to turn into cash can make a huge difference longerterm. This is where financial advice is key, we can ensure client’s assets are sufficiently diversified between tax wrappers and investment funds so that tax can be minimised and there is flexibility as to what can be liquidated within the portfolio.”
Some shares ISAS, for example, can be drawn from with little or no notice. However, it is always worth getting some advice before starting to liquidate investments. Very few people are knowledgeable enough about the markets to pick which stocks if any, it makes sense to cash in to meet a sudden cash crisis.
Often, Jefferies points out, it will make more sense to look at all the expenses that the household is facing. Are all these costs strictly necessary, given today’s difficult conditions? People are often reluctant to rethink their lifestyles if there are other options. However, cutting back on long term savings on the assumption that it will be easy to replace those savings when times get easier, can be a very slippery slope.
“Right now, we are seeing clients dipping rather heavily into their investments and savings. We are doing our best to help them make decisions that will do the least damage to their long-term positions. Equity markets are not in great shape right now and it is all too easy to fall into the trap of buying high and selling low, which really destroys value,” Jefferies points out.
This is precisely the sort of time when it really does pay for people to have invested wisely in a sufficiently diverse portfolio, not just of shares, but of different types of savings vehicles.
“The sudden onset of a level of inflation that is already three times more than many people have seen in their lifetimes has hit everyone, from pensioners to those just starting work. To take just a few examples, the price of second-hand cars is already up by more than 30%, year on year and OFGEN’S increase in the price cap of gas is up by over 50%,” he notes.
Gas prices are almost certain to take another severe spike upwards when OFGEN reconsiders the price cap on gas in October. “We are currently in exactly the kind of economic conditions that demonstrate that wherever possible, people should not be consuming to the full extent of their incomes,” Jefferies notes.
On the plus side, he points out that his firm has seen a real surge over the last two years in people saving sensibly for the future. “When the lockdowns started in 2020 people found that their monthly expenditure dropped fairly dramatically. They didn’t spend as much on fuel, they couldn’t go out,” he notes.
Even when the lockdown conditions were eased, concerns over Covid tended to limit travel and leisure activities like eating out or going to the pub. Instead many clients invested or put money into various savings schemes.
“We saw very nice, steady, streams of cash going into medium and long term savings. However, now everyone is up against it, so the focus has switched to how best to turn some savings into cash, depending on where clients are in their accumulation journey.
“Good advice here can make a huge difference,” he notes. “We look to see what we can do, in each instance, to protect the client’s investment and their future prospects. Tax planning advice is also critical here,” he says.
Making decisions about how much to save and where to save is a hugely important business. It can make the difference between someone having a comfortable retirement, rather than struggling with poverty in their old age.
Small business owners are particularly in need of advice during a period like this. “The pandemic made everyone a lot more conscious about the importance of being healthy. Financial planning for business owners involves looking at things like insurance for the business. What kinds of protection are in place, for example, if the owner or key personnel fall ill? Proper planning to take account of these sorts of possible outcomes can make a huge difference to the success of the business,” he warns.
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