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Middle England faces 'perfect storm' of inflation and poor returns

Middle England faces 'perfect storm' of inflation and poor returns

A combination of inflation, low interest rates and diminishing tax relief is squeezing middle England, a senior business development director at Ingenious has said.

Advisers and their clients should be thinking about meeting these needs, Simon Harryman said.

Real returns are in negative territory due to inflation and low interest rates.

CPI inflation is currently at 4.2 per cent and is predicted to exceed 5 per cent next year, alongside a base interest rate of 0.1 per cent.

“The real rate of return [based on RPI inflation] is -5.9 per cent today, meaning that savings and income are being eroded", Harryman said.

Further to this, because of the cost of the pandemic HM Treasury is freezing certain tax allowances.

“For example, the inheritance tax nil rate band has been frozen for a while [...] and relative to inflation the value of these exemptions and allowances is lessened as well.”

The impact of this will be more people being forced to repurpose their savings to meet living costs, Harryman added, but not everyone will be affected.

“As is always the case in life, the very wealthy will be okay because they’ve set themselves up [well] and they’re in a position where certain things won’t affect them.”

To a certain extent, he added, those who are economically challenged will be less affected as they won’t have as many assets that feel the impact of lower returns.

“There’s a real returns crisis on what returns people get on their savings, if you don’t have savings it doesn't affect you, equally if you're below the threshold of state assistance the state will look after you.”

It’s middle England that will end up suffering, he said.

“Those people who have resources but don’t have enough to be completely comfortable [will] end up getting squeezed.”

“The problem for them is that they find themselves in a situation where their plans may actually be in jeopardy and they’ve got to review those plans because their resources [won’t provide] enough to do everything now because they’re being squeezed in so many different areas.”

The solution to this problem is ensuring those who need it have financial advice to help preserve and meet their estate planning objectives, and those who already have financial advice make sure they are clear about their needs.

“Advisers and clients need to think long and hard about how their resources can meet their needs, but those needs are getting more complex and the challenges are becoming greater because of the situation we’re in.”

In addition, advisers and their clients should be looking at “pulling every lever” available to them to try and maximise their investments, such an uncapped special incentives. 

“If people do nothing, inflation [will] just chip away at them and eat what they have.”

sally.hickey@ft.com