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Wealth managers warn retail investors over rising inflation

Wealth managers have urged retail investors to take account of the impact of rising inflation in the wake of a 10.1 per cent surge in UK consumer prices revealed this week.

Savers should look to pay off debt, review present and future spending intentions and retirement plans, and try to reduce the effects of inflation on their portfolios, as a result of soaring prices, financial experts said.

The official inflation statistics for July broke through the double-digit barrier for the first time in more than four decades to hit an annual 10.1 per cent. UK households face the highest inflation in the G7 group of advanced economies.

As well as intensifying worries about the cost of living, inflation leads to rocky market performance, which makes it harder for savers to guard their wealth through investing.

Only gold and residential property investments gained ground in inflation-adjusted terms in the year to the end of June, according to analysis from investment platform Interactive Investor, while other asset classes lost value in real terms.

“Rising inflation continues to attack consumers from all angles and shows no signs of easing off any time soon,” said Les Cameron, savings expert at M&G Wealth.

Cameron said that official inflation statistics were more useful as a broad economic gauge than as a guide for households rethinking their budgets. “The inflation measure is ‘one size fits all’, so depending on your age and lifestyle your reality may seem wholly different,” he said.

Rather than assuming that prices will rise about 10 per cent across the board, people need to dig into their personal budgets to see how much they spend in different categories and how much those costs are going up. Those on lower incomes, who spend a larger share of their income on food, will be hit harder as food prices rose 12.7 per cent, for example.

Housing costs went up by an overall 9.1 per cent increase in the year to July, an impact split between renters and homeowners, many of whom will have to worry about the knock-on effects on their mortgages.

Column chart of Contributions to annual CPI by sector showing UK CPI inflation cracks 10 per cent

Adrian Lowery, financial analyst at UK wealth manager Evelyn Partners (formerly Tilney, Smith & Williamson), said higher inflation increased the pressure on the Bank of England to raise interest rates.

“[This] should really focus the minds of borrowers who can take steps to try and lock in at rates that are on the market now,” he said. “Some lenders will be considering withdrawing their best rates after this inflation data.”

“The increasing cost of servicing mortgage debt is inflicting something of a double whammy for homeowners, and particularly those with larger loans that are coming up for renegotiation in the coming year,” he added.

The cost of other borrowing is also expected to rise, so experts suggest households pay down as much debt as possible before higher interest rates bite even harder.

Retirees face particular challenges as rising prices make it tempting to take more out of their pensions savings, at the same time as markets have hammered portfolios.

“The natural thing to do in response to rising living costs might be to take more income from your pot to maintain your standard of living, but this increases the risk of your fund running out early,” said Tom Selby, head of retirement policy at AJ Bell.

“This risk will be further exacerbated if larger withdrawals are combined with substantial market falls — something many have already experienced in 2022.” 

Among AJ Bell customers, 16 per cent of pension investors were increasing their withdrawals. But a larger cohort, 24 per cent, were cutting back their income as the markets fell, and 60 per cent were holding steady.

“In order to retire, people will need bigger pension pots than before to cope with rising prices, but at the same time, they are likely to feel even more cautious about using their retirement savings, for fear of running out of money too soon. They are caught between a rock and a hard place,” said Becky O’Connor, head of pensions and savings at Interactive Investor.

The simultaneous sell-off in stocks and bonds for much of this year has been particularly hard on do-it-yourself investors, since conventional wisdom holds that losses in one asset class should be counterbalanced by the other. Interactive Investor said the average Isa portfolio on its platform lost 16 per cent in the year to June.

Dan Howe, head of investment trusts at Janus Henderson, said: “It is essential in inflationary environments like this that families and individuals take action to protect their savings . . . Diversification is our friend in times of uncertainty.”

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