In Focus: Retirement Income  

How to boost income in an inflationary world

  • To understand how clients feel about inflation.
  • To be able to explain how inflation affects savings.
  • To be able to express the virtues of a range of asset classes in a portfolio.
How to boost income in an inflationary world
Elina Sazonova via Pexels

As the UK’s lockdown measures begin to ease, there seems to be a greater sense of optimism that things are returning to some form of normality.

However, this is not to say that the economic uncertainty caused by Covid-19 will grind to a halt any time soon.

The virus has inflicted a great deal of damage to household finances. As businesses have been faced with the prospect of collapse in the difficult economy, this in turn has affected the job security of Britons, with many being placed on furlough or being made redundant.

Consequently, individuals are experiencing a range of difficulties, and namely, the ability to save for their financial futures.

For over a year now, interest rates have been held at historic lows of 0.1 per cent, with inflation rising to 0.7 per cent throughout March – an increase of 1 per cent from the previous month.

While this is a modest rise, experts are anticipating that inflation will increase further to 1.7 per cent throughout April and May, as Britons returned to the high street and started to spend more in shops, as well as online. 

In some respects, for the economy as a whole, not all inflation is bad: as the cost of consumer goods begins to return to pre-pandemic levels, this might indicate that the UK economy is finally turning a corner on the road to its post-pandemic recovery.

Certainly, low base rates have made it possible for individuals to borrow under the volatile economic climate, facilitating consumer spending and economic growth against the odds.

However, this has also created a hostile environment for savers – particularly those dependent on traditional methods of saving, such as savings accounts.

Worryingly, almost two fifths (38 per cent) of adults have had to put their long-term savings strategy on hold, according to a recent survey commissioned by NerdWallet.

As such, some savers are turning to financial advisers in an attempt to counter the effects of low interest rates and rising inflation. And this can place a tremendous amount of pressure on such firms.

The consequences for savers

Increases in inflation – even modest ones – can be challenging for savers, given that this will reduce the spending power of their money over time.

As such, Britons will find that their cash will not go as far as anticipated. Therefore, individuals might be forced to delay important savings goals, such as a house deposit or a wedding - but they should not put off saving for very long term goals, such as retirement.

Looking beyond market inflation expectations, historic low interest rates are likely to complicate matters even further for savers.

Although the Bank of England has opted to maintain the current base rate of 0.1 per cent – making the prospect of negative interest rates unlikely any time soon – such consistently low interest rates will mean that savers are seeing their savings lose value in real terms.