The UK inflation rate in July 2023 was 6.8%, down from June’s high of 7.9% but still much higher than the Bank of England’s target of 2%. The phrase ‘falling inflation’ doesn’t mean falling prices, just that prices aren’t rising as fast as before.
In an attempt to curb inflation the Bank of England increased interest rates to 5.25% (rate in August 2023, set by the Bank of England in June 2023). The idea is that if it’s more expensive to borrow, people and businesses won’t. It also makes existing debt more expensive to repay, as has been shown in stark relief with mortgage rate rises. The assumption is the rate rise will slow spending, which will reduce demand, which will slow price rises.
The other side of the coin is that savings might yield more, but that has to be set against the fact that with inflation running high, savings are effectively worth less. Supposing inflation falls further to, say, 5.25%, then provided your bank pays Bank of England base rate interest, your money will stand still.
Many households and businesses are feeling the strain of the current economic situation. Budgets have been burst and plans derailed. Against this backdrop it makes sense to take action to protect your finances, perhaps especially in the long term.
Here are our five top tips for dealing with inflation:-
1. Check your Mortgage Deal
Your mortgage is likely to be your biggest debt. That means interest rate changes have the biggest impact here. As things stand, rates are at their highest level since 2008.
If you are coming to the end of a fixed-term deal or hoping to secure something better than the lender’s standard variable rate, you could gamble on rates rising and take the best fixed-term deal you can now. Alternatively, you could move onto – or stick with – the standard variable rate (SVR), banking on rates having peaked and in anticipation of a lower rate in the near future.
There will always be an element of risk as mortgage rates will always fluctuate.
2. Look for the Best Interest Rate for your Savings
Rates offered by banks and building societies are rising and are expected to rise further. If you lock your savings into a fixed rate deal now, you might ultimately lose out – better deals might become available over the next weeks and months.
Shop around for the best rate of return but bear in mind keeping your options open might well be the best bet.
3. Safeguard your Retirement Income
Your pension is a major investment, intended to allow you to maintain a good standard of living once you stop working. However, years of inflation can batter what was originally a reasonable amount of income. So, what are your options?
- Payments from a level annuity start higher but are eroded over time; the higher the rate of inflation, the more buying power drops.
- Payments from an escalating annuity start lower but increase over time, giving you a better chance of long-term security.
- Payments from an inflation-linked annuity again start lower but rise year on year in line with the retail price index, avoiding erosion of income.
- A drawdown allows you to make regular withdrawals for as long as your savings last. It’s more flexible in that you can take more money when you need it, but when it’s gone, it’s gone.
4. Review your Investment Strategy
Should you save surplus cash or invest it? That can be a tough decision, but one thing is clear; in an inflationary economy, where prices rise faster than interest rates and erode the value of savings, investing can yield better returns. Inflation can actually increase the value of some types of investments.
If you decide to invest, the next decision is what in. You could buy high-value goods, for example, art, fine wine or land. Your profit is then realised on sale.
Alternatively, you could buy bonds, either from the government or a corporate entity. With bonds, you effectively lend your money to the issuer for a fixed number of years. During the time you own the bond you are paid a fixed rate of interest, and at the end of the term your original investment capital is repaid in full. There is risk attached – if the issuer hits hard times they might not be able to make the interest payments due, or worse, they go bust, meaning you lose your money.
5. Always Ask the Experts!
We always recommend seeking professional advice for anything mortgage, pension or investment related.
GreenStones Financial Services can give you all the expert advice you need. Simply, give the team a call on 01733 371180 to book a meeting today!