We continue to face a perfect storm of economic and geopolitical factors that are contributing to prices rising at their fastest rate, and consequently the sharpest drop in living standards, for 40 years.
Inflation rose to 9 per cent in April as the average petrol price increased by 12.6p per litre in response to the Russian invasion of Ukraine and the energy cap jumped 54 per cent, both of which coincided with tax raids to help reduce some of the debt the government took on to fund extensive pandemic relief packages.
We are seeing the biggest real-terms fall in incomes since the 1970s and the peak of the crisis is expected to be some months away yet, as the Office for Budget Responsibility now forecasts inflation will not peak until October, when Ofgem increases the energy price cap once again.
Opportunities are available to ease the growing strain on daily expenditure.Consumers are responding to the squeeze in the hope of maintaining their living standards, or for many, just to get by. Credit card spending is on the rise; UK Finance’s latest statistics show that balances on credit card accounts grew by 3.8 per cent over the 12 months to January.
The Bank of England’s consumer credit statistics also show the highest amount of borrowing via credit card was recorded in February 2022 (its most recent calculation) at £1.49bn.
The BoE has also been responding by voting in four consecutive monetary policy meetings to increase interest rates, with the latest rise to 1 per cent, and it is expected to reach 2.5 per cent by the end of the year. This means homeowners on tracker or variable rates are experiencing rising costs in yet another area of their finances.
But opportunities are available to ease the growing strain on daily expenditure, especially for those who are heading towards retirement and have few earning years left or are already retired.
Equity release
If not undertaken already, advisers should use cash flow modelling tools to demonstrate the impact of inflation on their clients’ finances and to discuss what adjustments may need to be made.
One opportunity that a growing number of over-55s are embracing to source capital is equity release.
Amid the widespread economic volatility over the past couple of years, property prices have continued to grow firmly and consistently. This month, house prices are up 12.1 per cent on this time last year, and have been increasing at the fastest annual pace for more than 17 years, according to Nationwide.
As always when it comes to finances, the emphasis should be on long-term planning.An equity release loan unlocks a tax-free lump sum of a home's equity while ensuring 100 per cent of the property remains with the owner – this has usually been an area of worry for clients. This makes for an effective way of raising money for retirement without having to downsize or move to a less expensive area.
Equity release lending activity in the UK totalled £4.8bn in 2021, six times greater than in 2011, analysis by the Equity Release Council found. Product choice has more than trebled in the past three years alone, climbing to 665 products in January 2022.
When considering equity release, advisers need to be ahead of the curve, ensuring that they are offering clients the most suited solutions to help them get the retirement they want.
Last month, the ERC added the ability to make partial repayments penalty free to the standard features that equity release providers must offer on schemes it recognises.
This means equity release customers can reduce their borrowing if their circumstances change, and could also increase their chances of still being able to leave behind a traditional inheritance. This is just one way that could help ease the strain on people’s living costs.
The importance of rigorous advice will be greater than ever.As always when it comes to finances, the emphasis should be on long-term planning. There are peaks and troughs in any market, and though the current cost of living crisis may result in some short-term pain, financial advisers are well-versed in the bigger picture.
Indeed, while further inflation is expected in the coming months, the BoE then anticipates it to fall back materially.
The importance of rigorous advice will be greater than ever so that clients are provided long-term satisfaction as well as short-term relief.
As financial advisers, we need to ensure our clients understand the challenges and opportunities in the meantime, and beyond, to help them financially plan as best they can to weather the storm.
Mark Rodgers is an IFA at Ascot Lloyd
