Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
INFLATION is sometimes described as the hidden risk for your money - but right now the risk doesn’t seem so hidden.
Economists all over the world are revising their expectations for price rises upwards - most notably for us in the UK at the Bank of England, which today confirmed it expects the headline rate of UK inflation to hit 4% this year. The Bank previously expected inflation to rise to 3% before falling back again.
Remember, the Bank has the target of keeping Consumer Price Index (CPI) inflation close to a target of 2%. The difference in these numbers may seem small - but take a closer look and they add up to big differences for households and investors.
For households, a 4% aggregate rise in inflation includes much higher rises for everyday items that they can’t escape. Petrol prices, for example, are rising much more quickly and the RAC has reported that a driver filling up a petrol car with a 55-litre tank pays on average £3.08 more now than at the start of June, and £11.47 more than a year ago.
For investors, higher inflation means assets need to achieve a higher return just to maintain their value. There’s various ways to illustrate the effect of higher inflation on your wealth, but one is to consider what your money today would buy in the future. At an inflation rate of 4%, which the bank believes we will hit this year, £1,000 today would buy just £442 after 20 years. In other words, your money has more than halved in value over that period.
The problem is particularly acute for those living in retirement, where the income they receive is likely to be fixed. Ensuring that income rises at least by the rate of inflation is a challenge so assets that have the potential to do it are in demand. The State Pension is particularly valuable because it is one source of guaranteed income that should rise by at least the rate of inflation.
Cash savings are particularly exposed to the risk of inflation given that savings rates are now falling behind inflation by a significant margin. The highest-paying accounts today will return just 1.67% - less than half the rate of inflation expected by the Bank - and will require you to tie your money up for five years.
Outside that, pension funds held in investments - for example as part of a drawdown plan - have the potential to grow at a rate that exceeds inflation but come with the risk that they can fall in value as well, with income levels not guaranteed. While inflation at the level predicted by the Bank may prove short-lived, the threat of some inflation is likely to persist. Beating it in the long term may require accepting the risk that comes with investments such as shares as part of a balanced range of assets.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Withdrawals from a pension product will not be possible until you reach age 55. The Government’s Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at www.pensionwise.gov.uk or over the telephone on 0800 138 3944. Fidelity’s Retirement Service also has a team of specialists who can provide you with free guidance to help you with your decisions. They can also provide advice and help you select products though this will have a charge. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.
Share this article
The quickest way to reduce your carbon footprint today
Putting pension savings on a green footing is 21 times more powerful than oth…
Can the Domino’s Pizza share price continue to recover?
Collections up as delivery growth slows