Financial Matters

With Akwasi Duodu | akwasi@sterlingandlaw.com | www.sterlingandlaw.com

Inflation: The thief in the night

Inflation is not a good thing. When inflation happens, your purchasing power is reduced. Your money is worth less. Every pound you own buys less.

Why has inflation crept up on us? Demand for oil and gas has pushed up energy prices worldwide. This means higher bills for homes and businesses. Shortages of many goods such as building materials and computer chips are causing supply problems and pushing prices up. Government pandemic support to businesses such as reduced VAT for hospitality has ended. Everyone, it seems is feeling the pinch, but those hurt most by inflation are those with fixed wages and those with cash savings. So what can we do about it? Here are three things to consider:

Shift Longer Term Savings To Equities

It is always a good idea to have a decent amount of easily accessible cash available for short term emergencies. Any money set aside for the long term could however be vulnerable to the corrosive effects of inflation. You may have more money than is necessary in cash – i.e., bank deposits or current account. If so, consider whether you could move a portion of it into an investment with potential for long term growth. Historically, by far the most effective investments at beating inflation over the long term have been equities. You do however need to be comfortable with the risks associated with them, i.e. your investment will rise and fall in value.

Maximise Tax Efficiency

Inflation is discreet and creeps up on you when you aren’t looking. Tax however is blatant and more akin to daylight robbery! So paying excessive tax on money that is being depleted by inflation can be quite a nasty double-whammy. Once you have considered how to get an inflation beating return on your money, consider your investments’ tax efficiency. ISAs and pensions are tax efficient investment vehicles designed to help you save and invest over the long term. ISAs allow you to save up to £20,000 each year. Any growth or income on the investment is free from tax. Withdrawals are also tax free, and you and your financial adviser could set up an investment strategy specifically to combat inflation. Pensions can be even more tax efficient. Contributions are eligible for tax relief at up to 45%, depending on your taxable income. Pensions and ISAs are the most popular, but there are other less well known but highly effective taxshelters for your money.

Seek Expert Advice

There are lots of things to consider in trying to beat inflation; especially for those with fixed wages. Taking advantage of available investments and combining them well with the tax breaks offered to UK investors could help you combat the eroding effects of inflation. In other words, you could benefit from the powerful impact of compounds growth – i.e. earning returns on your returns to help outpace inflation. There are however lots of things to get wrong. A sensible investment strategy should always take account of your risk appetite, time horizon, hold a wide variety of assets, and utilise tax efficient investments at a reasonable cost. Working with an investment expert who could structure a diversified portfolio tailored to meet your long-term financial goals and attitude to risk would be the way to go. We may all be feeling the pinch. With thieves in the night and daylight robbers waiting to pounce it’s time to do what you can to protect your savings from them.

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