From an all-time low of just 0.1% in March 2020, to its highest figure in decades, it is fair to say that the security blanket around the inflation rate has been well and truly pulled from under us.  

Our team at Simpson Financial Services often finds that changes such as the rate of inflation and cost of living are not fully understood. Nor is the impact that increasing inflation can have on long-term savings and overall financial planning.

If you are feeling deflated by the bubble bursting and wondering how the inflation rate will impact your financial circumstances, please read on as we discuss why now is a perfect time to review your tax, investments, and overall financial planning.

A few weeks since the announcement of the dreaded 5.4% inflation rate, and with increases in energy prices, and a return to office working for many now looming, there is a lot to take in. So, we want to encourage you that financial planning and even completing your year-end tax return are not all doom and gloom!

Our previous post highlighted some of the benefits you can glean with tax exemptions and annual allowances you can claim. But we also mentioned the importance of understanding the whys and wherefores around Inheritance Tax and Capital Gains Tax.

And there are plenty of other considerations, which we will now run through for you.


How will my spending and savings be affected by the inflation rate?

In essence, the ‘buying power’ of your cash savings will diminish as the inflation rate rises.

Although price increases may not hit all areas equally and at the same time, the impact is likely to be felt in such things as your grocery shop, filling your car with fuel, and entertainment spending. With positive progress on the pandemic front as we feel our way towards the new norm, we might want to treat ourselves. But just be aware that a cinema trip and fast food for your family will be more expensive than before Covid, as the cost of goods and services increases.

Over time, this means you will find yourself dipping into your savings, particularly if your income fails to match the rising cost of living. In fact, according to recent research, to maintain the same buying power you had only 12 months ago, you will need an average 8.2% pay increase based on a £40,000 per year salary.

Sadly, not in line with expectations as employers continue to feel the brunt of the past two years.


So, what can you do to cut back?

Go back to once-a-week or even monthly takeaways. Running out of ideas for home cooking was admittedly an issue during the peak of the pandemic but consider your savings and the increased inflation rate now. Rather than spending so much on fast food, review your weekly food shopping instead.

On that note, do you really need the same grocery treats you were satisfying yourself with when lockdown was an excuse? In fact, branded items could be replaced with supermarket favourites and see how much of a difference you notice on your receipts.

If you are heading back to the office, be careful not to slip straight back into your old habits of sneaking into the corner coffee shop for your latte and cake every day. Your waistline will bulge, and your savings will slim down pretty quickly!

It really is a case of sitting down with the family and being honest about where your money is trickling through, and where it could best be invested.

We predicted in April last year that cash savings could fall into a negative position, although the inflation rate rising to over 5%, and potentially continuing to rise, was not anticipated at that time. So, it is even more important now that we work with you to take you through a complete financial review ensuring your finances remain strong.  


Life Assurance and Home Insurance

A review and consolidation of your financial portfolio should include future planning - not just focusing on day-to-day expenditure. Everything from estate planning, retirement costs, making a will, and insurances.

For instance, whilst home insurance, and buildings and contents cover often increase automatically through your premiums, the same is not necessarily true of life assurance.

We would advise reviewing your personal insurance and any income protection you have in place, just to ensure they continue to maintain ‘real value’ cover.

Our Independent Financial Advisors and experts in specialist services will guide you through every area of your life, to make sure the future is secure for you and your loved ones.


How does the inflation rate affect Inheritance Tax?

We touched on the benefits and allowances in relation to IHT in our previous post. But have you considered that a rising inflation rate will also drive up the value of your assets?

Whilst this is a positive result for some, it could also mean a higher proportion of your estate falls into the 40% tax bracket, if the estate value goes above the threshold.

Again, it is worth reviewing the steps you can take to stay well ahead of the game when it comes to estate planning and utilising allowances and exemptions at least annually.


What about loans, mortgages, and investments?

The next Bank of England’s Monetary Policy Committee meeting is on 3rd February and then on 17th March, 2022. The outcome of these meetings will give us a clearer view of interest rates, and how much impact the increased inflation rate has had.

We will also gain greater clarity on the impact of your loan and mortgage repayments. Whilst increasing interest rates is beneficial for those with savings, we have to balance this out with the reverse effect on borrowings.

Remortgaging and loan consolidation may be an option if you are concerned about the current strength of your financial position. And of course, something we offer as part of our financial services.

Whilst investing can be a lucrative way to manage your cash, if you are considering investments, do please seek expert financial advice. Without experience and knowledge of the markets, you could be putting your financial security at even greater risk.


Avoid the stresses of a rising inflation rate

Here at Simpson Financial Services, as an independent broker, we have access to the entire range of market products, so we formulate the most appropriate plan for your specific circumstances.

Investments, estate planning, mortgages, savings, pensions, and insurance are our forte. In fact, we cover every financial aspect of your life. Every milestone is catered for.

And our team of experts will become not just your very own independent financial advisors, but also become trusted friends.

So, if you are concerned about how the cost of living, interest rate changes, and the rising inflation rate is impacting your financial situation, contact us today for a friendly chat, or to book a review. We are here to take the stresses out of your financial planning.