The impact of rising living costs on wealth accumulators

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.

“[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.

And while people above the state pension age will not be affected by the temporary increase to NI contributions for the upcoming tax year, they will be liable to pay the health and social care levy from April 2023.

“Some of those who continue to work at this stage in life will do so out of a desire or enjoyment in doing so, but others will do so out of necessity,” says Cowan.

“For the latter, part of their income will fund expenditure and part will typically be saved for their future retirement in proportions higher relative to younger clients.

“This leaves very little room for increased taxes, particularly at a time when their cost of living is rising.”

Cash flow modelling for accumulation

Smith at Foster Denovo says the point where an adviser believes rising living costs will affect a client’s longer-term objectives is when a client should consider adjusting their balance between spending and saving.

“If you’ve modelled or updated somebody’s cash flow plan and agreed that inflation could mean a different outcome in the future, talking to clients about how they could mitigate that now is important.

“So does that mean, for example, that they should consider saving more? Can they afford to do that at this point in time? Perhaps not, because increased living costs means they have less capacity to save.

“Could it mean that clients have to work longer? That’s going to be a big change for somebody, and setting an expectation about that is pretty important.

“So it’s a question of having those conversations, and helping clients to understand how it might impact their longer-term plan.”

To counter rising living costs, Adam Johnson, director at New Forest Wealth Management, a senior partner practice of St James’s Place, suggests that advisers can take the following steps in relation to cash flow forecasting:

• Agree to your inflation assumption. When cash flow forecasting and using goals-based planning with clients, discuss the impact of inflation, and agree to and justify a level on which to base the forecasting.

• Build in sufficient contingency. Once you have planned out the financial model, run through stress test scenarios with inflation, much in the same way you would stress test the loss of a job or the fall in the markets. Ensure that there is an adequate emergency fund to help bridge the unexpected.

• Take a financial health check. There are usually significant savings to be made for clients in day-to-day planning that can be easily overlooked. For example, switching bank accounts can mean a client receives up to £150, and claiming marriage tax allowance can save clients £1,200 a year in tax. Clients can also claim their working from home tax allowance and switch to reward credit cards to earn cashback or vouchers.

• Review and ensure a client’s asset allocation not only meets their needs and objectives but is also designed to provide some protection against inflationary pressures.

• Hold regular reviews to help clients review their objectives in light of any changes in circumstances, taxation, legislation and market conditions. Building a forecast is only the first stage of the financial planning; the most important part is then the ongoing course correction to ensure clients remain on track to meet their financial goals.

Chloe Cheung is a features writer at FTAdviser