The Bank of England (BoE) released its economic forecast for 2021 last month and predicted a rise in GDP of 7.25%. The figure marks the fastest growth since world war two and comes as the country begins to recover from the financial ravages of the coronavirus pandemic.
But, the governor of the BoE, Andrew Bailey, urged caution too, calling the recovery a “bounce back” rather than a boom. The Office for National Statistics (ONS) has confirmed that the economy contracted by 9.9% in 2020, the largest fall since the Great Frost of 1709.
The BoE’s policy committee also voted unanimously to keep interest rates at their historic low of just 0.1%.
What does the economic recovery – and the possibility of rising inflation – mean for your pensions and investments?
Keep reading to find out.
The impact on your savings
Back in February, financial consultancy firm LCP reported that the coronavirus pandemic had created more than six million “accidental” savers between March and November 2020.
Those on higher incomes – and more likely to be able to work from home – tended to find saving easiest. But young people too were able to save as their options for spending became increasingly limited.
Now, as restrictions lift, households are set to spend some of the £150 billion of accumulated lockdown wealth. A BoE survey suggests that consumers will part with about 10% of their accidental funds as the country reopens, while half say they will keep the money in savings.
This increased spending will help to fuel the UK’s recovery, but it could also lead to a rise in inflation.
Inflation doubled in April
The UK’s inflation rate more than doubled in April 2021, rising to 1.5% from just 0.7% the month before. In May, it rose again, to 2.1%, breaching the BoE’s inflation target in the process.
Rising oil prices pushed up the cost of petrol and household gas, and electricity bills. The cost of clothing and footwear also increased, helping to explain why prices are now rising at their fastest rate since March 2020, at the outset of the pandemic.
Consumer Prices Index (CPI) percentage since January 2017:
Source: Office for National Statistics
If you have “accidental” savings in your bank account, rising inflation could be unwelcome news.
Savings rates have been low since the global financial crisis in 2008 and fell lower still in March 2020. The interest rate you currently receive is likely to be considerably lower than the 2.1% of inflation, which means your money is effectively losing value in real terms.
Rather than keeping the funds in savings, you might consider paying off any high-interest debt you have or paying your future self now, through increased pension contributions.
Speak to HDA if you have additional funds and we can help you decide the best way to make use of them.
Inflation-proofing your pension
Rising inflation decreases buying power and this affects your pension fund too. But there are things you can do to combat inflation.
Pre-retirement
Before you reach retirement, it is important to be sure that you are contributing an amount that is sufficient to provide you with the lifestyle you want.
This involves understanding your lifestyle now and how much that lifestyle will cost in retirement. A simple CPI inflation calculator confirms that if your retirement is still 20 years away, you’ll need £148.59 in 2041 to achieve the same spending power as £100 today (based on inflation at 2%).
We can help you decide on the right amount to contribute now.
At retirement
You’ll have plenty of different pension options to consider at retirement.
While you might opt for a lump sum or flexi-access drawdown, don’t forget the traditional annuity.
Moneyfacts recently confirmed that the pandemic caused a £159 a year drop in the average annuity. Rates too, have dropped since the introduction of Pension Freedoms in April 2015.
And yet a steady, regular income has its benefits too.
Not only does it make budgeting easier, but you can also opt for an annuity that rises each year to combat inflation. This could help to ensure you can cover household bills, even as their costs rise.
In retirement
If you do opt for a flexible income in retirement, you’ll need to carefully manage your withdrawals. This means considering fluctuations in the stock market and being sure you only withdraw what you need.
Lower market prices will require you to sell more units to realise the same withdrawal amount. Equally, when the markets are performing well, you could accidentally withdraw more than you need. Excess withdrawals will likely sit in your bank account, leading to the same real-terms loss of value as the rest of your savings, when measured against inflation.
The amount you keep invested has the chance to grow, possibly outstripping inflation depending on the level of risk you are willing to take. Remember that your invested amount can fall as well as rise and that past performance is no guarantee of future performance.
Get in touch
At HDA we can help you put a plan in place that works for you, throughout the accumulation and decumulation phase of your retirement.
If you’d like to discuss how our decades of experience in the markets can help build a robust strategy aligned with your long-term goals, please get in touch. Email enquiries@hda-ifa.co.uk or call 01242 514563.
Please note
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
