Five ways to boost client savings despite inflation

In April this year, the GfK Consumer Confidence indicator in the United Kingdom fell to its lowest level since July 2008, well below market consensus of -33.

This came amid higher interest rates, a rising cost of living and soaring inflation. 

It is also the second-lowest reading since records began almost half a century ago, with the outlook for consumer's personal finances, at -26 and the general economy at -55 a worse reading than when the 2008 financial crisis occurred.

With the squeeze being felt on clients' pockets, here are some possible tips from advisers to help them maximise their savings:

1. Shop around for the best savings rate

Clients' inability to spend during lockdown added almost £200bn to household cash savings. That is equivalent to an average of about £7,000 per household.

One must make any savings work as hard as possible, especially with the recent price increases that most have been feeling recently.

Because interest rates vary between different savings accounts, many commentators would advise on shopping around for the best deal.

To highlight the point, the Bank of England has reported that £250bn of all household cash savings are in accounts paying zero interest.

It’s clear to see how cash Isas are being eroded by rising inflation.Rachel Springall

Carolyn Matravers, chartered financial planner at Old Mill, said: “Cash returns are low, and it is important to apply the same logic to interest rates as we would for energy bills, car insurance etc - consider if they can do any better. 

“We all need cash savings, and it is important to retain an emergency fund to cover anything unforeseen, but clients need to keep the balance under regular review. Is the level reasonable or has it crept up during lockdown?

“If so, they should approach their bank to ask if there is anything more suitable to provide a greater return on their balance."

2. Look beyond the cash Isa

More than £580bn household wealth is in Isas, thereby benefiting from their tax benefits of no tax on returns and no exposure to capital gains tax upon withdrawal.

But, since their inception in 1999, depositors have leaned towards the fixed, low-rate-of-return cash Isa against the stocks & shares Isa, despite the latter's potential for higher long-term returns.

The HM Revenue & Customs figures from 2020 showed nearly two thirds (64 per cent) of the £67bn invested in Isas was deposited in cash products, despite record low rates of interest.

This was a volatile period.Springall

As inflation rises, now may be the time for clients to possibly reconsider the stocks & shares Isa, especially if they are saving for the longer term.

Speaking in February, Rachel Springall, finance expert of Moneyfacts Group, said: “The average stocks & shares Isa fund returned a growth of 6.92 per cent over the past 12 months, which was more subdued than the 13.55 per cent seen between March 2020 and 2021.

"However, as may well be obvious, this was a volatile period, with some primary fund sectors returning a substantial growth, such as 57.3 per cent for Technology & Telecoms.

"The past 12 months have been impacted by a variety of influences and this reaffirms the necessity for investors to keep an eye on their investment but not to make drastic decisions to switch without getting advice."

Consumer confidence has not been this weak since the global financial crisis of 2008. Not even the arrival of the pandemic shook confidence to the low levels we see todayAlistair McQueen

Springall added: "As inflation continues to soar and the Bank of England raises interest rates, it will be interesting to see how savers will respond and where they place their cash.

"It’s clear to see how cash Isas are being eroded by rising inflation, but consumers may not feel confident enough to invest in the stock market quite yet."

3. One mustn’t forget (almost) £1trn in old pensions

More people are saving for pensions. Many clients will carry multiple pension pots built up over their working life. When one is managing a client's finances, one must remember to look at all pension pots, not merely the current pot the client has.

It has been estimated that £940bn sits in pensions that are no longer receiving contributions, and have not yet been accessed. If it did belong to a client back then, it still belongs to them today. And you have options over how you can manage it.

Essentially, the longer you live the more chance you will have of benefitting from deferring the state pension.Charlotte Corr 

Andrew Page, chartered financial planner at Old Mill, said: “These days it is increasingly difficult to keep track of all the pension pots that you have accumulated from jobs over the years.

"Quite often the decision to join a pension scheme was made in the very early days of joining a new firm and then never thought of again.

“A good first step is to list all your previous employers and then try and tie up the pile of correspondence from the “safe place” with that list. If there are gaps, it is possible to locate these using the Pension Tracing Service."

To ensure all pensions, especially the older ones, continue to represent value for money, have a look at the charges each pension is carrying. If you conclude that a better pension could be secured elsewhere, you could consider transferring a client’s old pension.

This could be a very valuable action, but it also represents a significant action that may not be reversible.

So, it is often wise for client’s to seek professional financial advice if they are considering transferring or consolidating their pensions.

4. Use the pension freedoms to a client's advantage

Since 2015, people aged 55 and over with private pension savings have had much greater freedom in how they can access and deploy their pension wealth.

Before 2015, most pension holders used their pension wealth to purchase an annuity, guaranteeing a set income for the rest of their life. As interest rates have fallen, this income from annuities has also fallen.

The 2015 pension freedoms liberated the pension saver. Annuities continue to be used by many thousands of people every year. But they are increasingly used in conjunction with cash withdrawals from the pension fund, or are used later in life when the offered annuity rate may be higher.

The pension freedoms give clients choice. And this choice is more valuable than ever when the economy is volatile and prices are rising. The professional financial advice community is also expertly placed to help.

The pension freedoms are available from age 55, but there is no need for clients to act at 55.

Louis Christofides, financial planner at Saltus, said: “Pension freedoms offer the ability to draw down benefits from the age of 55 penalty free.

"This means that if you have no income between the age of retirement and state pension age, you can draw down from the taxable element of the pension up to your personal allowance of £12,570 tax free, in effect boosting the amount of tax free cash taken from the pension.

“This ability to flex income both up and down has become valuable in recent years; I was only speaking to a client yesterday who has seen her cost of living increase by £400 a month due to rising fuel costs and insurance premiums.

"We have matched this increase in costs by using pension freedoms to increase her monthly income from her pension."

5. Delay taking the state pension

While the State Pension Age is currently 66 for both men and women, rising to 67 between 2026 and 2028, it is worth reminding clients they can defer taking the state pension.

Deferring taking the state pension increases by the equivalent of 1 per cent every 9 weeks. This works out as just under 5.8 per cent for every 52 weeks. If the client can afford to wait, it may be worth recommending this value-adding option.

Charlotte Corr, chartered financial planner at Old Mill, commented: “It may seem appealing for some to defer the state pension in order to receive a larger pension income. However, it is important to understand whether or not this is in your best interests. 

"You need to weigh up the larger state pension in the future, versus giving up thousands of pension income in the short term."

She said if clients do defer the state pension, when they eventually start drawing the larger state pension, it could take a number of years (around 17 years) to break even. 

Corr added: "Whether you are better off drawing your state pension or deferring it to a later date is a matter of how long you think you will live. 

"Essentially, the longer you live the more chance you will have of benefitting from deferring the state pension.”

Grab control

Alistair McQueen, head of savings and retirement at Aviva, said: “It’s tough out there. Consumer confidence has not been this weak since the global financial crisis of 2008. Not even the arrival of the pandemic shook confidence to the low levels we see today.

“March 2022 was a bleak month for our finances. It saw inflation rise to a 30-year high; a downgrading of economic growth projections; a rise in the cost of borrowing; and real wages experiencing their biggest fall since 2014."

He pointed out all this was recorded before April’s rise in household energy bills and national insurance, adding: "It’s no wonder confidence is weak, and no rebound is on the horizon.

I was only speaking to a client yesterday who has seen her cost of living increase by £400 a month.Louis Christofides

“These pressures are beyond our individual control. But that does not mean we are powerless to act. Now is the time to grab control of our household finances.

"There may be no magic wand, but small actions could ease some of the financial pain as we wait - and hope - for the financial storm to pass." 

calum.kapoor@ft.com