With inflation soaring to a new 40-year high advisers have an opportunity to demonstrate their value to clients, according to investment experts.
The Office for National Statistics announced on Wednesday that inflation accelerated at a faster-than-expected level to 10.1% in July from 9.4% in June, fuelling the cost of living crisis and increasing pressure upon the Bank of England.
The Bank of England has warned that inflation could reach more than 13% this year, stoking concern that it will continue on its strict path of interest rate hikes, which risks pushing the UK economy into recession.
Jonny Black, strategic director at abrdn, said: “These inflation figures are just the latest in the continuing uncertain economic environment for clients. The Bank of England has forecast at least a year of recession, and that inflation will rise to at least 13% by next October. This is a level that many clients simply won’t have experienced. Now, more than ever, they’ll be looking for steady guidance and expertise to help them determine what to do with their money.
“On a fundamental, practical, level, ensuring that clients continue to have the right mix and balance of investments for their personal objectives will be key. Following today’s announcement, more adjustments might need to be made. But, in the face of a more pessimistic economic outlook, clients will also really value any additional insight advisers can offer – whether that’s sharing resources to help them understand the implications of recession or a prolonged, high-inflation on their finances, or a quick chat to discuss their queries and concerns.”
Steven Cameron, pensions director at Aegon, said its own research had shown financial worries were already at almost double the levels during the pandemic and warned that this latest inflation announcement will likely exacerbate fears.
Cameron said: “This latest inflation hike comes a day after official figures showed year-on-year increases in average regular earnings have slowed to 4.7%, well under half the current 10.1% rate of inflation, creating the worst loss in ‘real terms’ earnings for decades. For millions, the overriding focus will be on paying bills over the winter, but the aftermath could also come at a cost to longer term financial futures.”
Experts warned that rising inflation poses a particular challenge for retirees, for whom there is a significant risk that they will need to reverse their retirement decisions and re-enter work.
Andrew Megson, executive chairman of My Pension Expert, said: “Millions of over-60s have already ‘unretired’ in 2022. Meanwhile, hard-earned money sat in some pension pots will be losing value in real terms as prices around us rise so sharply. In many cases, this means retirees’ savings will not sustain the lifestyle they had planned, or at least not for as long as they intended.”
Megson called for “concrete plans” to be put in place to tackle inflation and support retirees.
Megson added: “For one, I would like to see ministers work closely with regulatory bodies to ensure retirees know where to access affordable independent financial advice, so they can better understand their financial situation, and make any necessary adjustments to their retirement strategy. Without proper support structures, we could see ‘unretirement’ become increasingly common across the UK in the months to come.”
Advisers should consider reviewing clients’ pension schemes to benefit from the inflationary benefit, after data from XPS Pensions Group found defined benefit pension scheme members could be £10,000 better off by postponing retirement by one day.
Analysis from XPS Pensions Group’s DB:UK Funding Watch shows that as a result of falling long-term inflation expectations, UK DB long-term liabilities over the last three months have reduced by around £100 billion.
However, the majority of increases to members’ benefits will be based on short term inflation rates published later in 2022 which are expected to continue to be in double digits and retirement options may not reflect this higher level of inflation. This could mean that a DB scheme member choosing to retire in early 2023 could see a material increase in their pension compared to retiring at the end of 2022 due to their benefit receiving an additional inflationary increase in 2023 which could equate to over £10,000 worth of extra pension income over a lifetime for the average pensioner.
Charlotte Jones, senior consultant at XPS Pensions Group, said: “What a difference a day makes, a member retiring on 1 January could receive an additional £10,000 over their lifetime compared to 31 December. As a result, at XPS we’re seeing a lot of Trustees reviewing the way that members’ benefits are calculated to ensure that no one loses out on these high inflationary increases.”
