The impact of rising living costs on wealth accumulators

This article is part of
Guide to rising living costs

The impact of rising living costs on wealth accumulators
Credit: Hollie Adams/Bloomberg

The upcoming increase in national insurance contributions, at a time when inflation is predicted to exceed 7 per cent, will see many working adults experience financial pressures not only when they earn, but also when they spend.

But compared to retirees, working clients will still be earning, albeit probably a little less, and therefore will generally have the luxury of time to continue accumulating assets.

High-income households, of course, are more likely to be able to withstand rising living costs and higher NI contributions.

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“[There will be] a disproportionate effect on those on lower incomes or those with less wiggle room to absorb those increases in tax and living costs,” says Jamie Smith, partner at Foster Denovo.

“It [also] depends on individual pay increases. Some will get more generous pay increases than others. But it’s an important consideration because in theory [rising living costs] could leave people with less available to save for the future.

“And I think discussing that with clients is even more important, and planning for the future earlier is going to be even more important for those who are disproportionately affected.”

Time for rainy day funds?

Where people’s living standards are going to be affected, Rosie Hooper, chartered financial planner at Quilter Private Client Advisers, suggests it could be the time for any rainy day savings to step in.

“This is what the emergency fund is for. If all of a sudden, inflation’s going up, and your salary is not going up in line with it, an emergency fund will bridge the gap.”

The Bank of England expects inflation to rise further to around 7 per cent in the spring, and for inflation to be close to its 2 per cent target in around two years’ time.

Steph Willcox, head of actuarial implementation at Dynamic Planner, proposes that reducing expenditure on luxury items for a year may be all that is required to maintain the same levels of saving, and therefore preserve a client’s retirement or longer-term spending goals.

Whether or not clients should adjust their expenditure in response to rising living costs, William Stevens, head of financial planning at Killik & Co, says it is something to monitor.

“I think that’s where part of working with clients on an ongoing basis adds so much value, because you’re able to adjust things based on changes in the client’s personal life but also in the broader macroeconomic picture.

“If you set up a plan for a client two years ago, there have been significant changes in the environment since then.

“Tax rates have moved around, we see the new [health and social care] levy and now we’re looking at an environment of inflation at a much higher level than individuals could have predicted two years ago.

“So it remains always as important as possible to continue to review those plans.”

Sam Cowan, chartered financial planner at Charles Stanley, says advisers can recommend that clients take advantage of salary sacrifice schemes to reduce their NI contributions.