Barry Coidan has the same burning question that many millions of households are confronting this year: how can he protect his hard-earned savings from rampant double-digit inflation?
The annual rate of the rise in the cost of living reached 10.1pc in the year to July, its highest level since 1982. The most pessimistic forecasts say it will exceed 22pc by next year, although the freeze on energy bills should help keep the figure under control.
Soaring prices will eat away at savings pots and retirement plans and savvy households are acting now to get ahead. Mr Coidan, who is 75 and retired, is keen to minimise the damage to his own finances.
He said: “We live comfortably. I enjoy a trip to the theatre and along with my wife will now and again splurge on the odd holiday. But really we are not big spenders and we save a lot of our pension each month.
“My biggest concern is protecting what we’ve already saved in an attempt to stop inflation from eating into it too much.”
Mr Coidan is a skilful saver. He receives an income of £2,500 from his Civil Service and state pensions each month, of which he is able to save £1,000.
The couple own their home outright and so have no mortgage or rental payments to meet. They have £90,000 in cash savings in accounts that pay between 0.6pc and 3.05pc in interest.
But Mr Coidan knows that keeping his savings in cash means they will lose value in real terms. The last time cash returns were this poor was in February 1976, according to analysis from the insurer Scottish Friendly and the Centre for Economics & Business Research, a consultancy.
Mr Coidan invested £10,000 in the Schroders Personal Wealth Cautious Portfolio last year using a stocks and shares Isa, but it has not fared well, falling in value by 8pc since July 2021.
He is open to investing more of his savings if it will protect his funds from inflation, but is relatively risk-averse.
“Really, I would like to know whether there is any point in me investing at this stage of my life and in the current market,” said Mr Coidan. “I’m not interested in additional income, just protecting what I’ve already got.”
Hayley North, chartered financial planner at Rose & North
Mr Coidan does not need to take any investment risk to maintain his lifestyle in retirement. He also has a fairly high capacity for loss – as he already gets more income than he needs and doesn’t spend much – which frees him up to invest more, if he wishes, to obtain a better return.
It is always prudent to keep cash back for emergencies, especially in the current economic environment, but current interest rates will not protect against inflation in the long term.
Given that he owns his house outright and has enough guaranteed income from his pensions to comfortably meet his needs, investing cautiously – and perhaps gradually – would be a sensible decision.
Many people have taken their money out of investment funds in recent weeks, fearing that markets will fall further. They now face the challenge of timing their re-entry to benefit from the recovery when it happens.
Investing gradually over the next few months would mean Mr Coidan did not need to attempt to “time the market” and ensure that he benefits from current lower fund prices while minimising his risk of further falls.
It makes sense to use his annual Isa allowance in full, which is currently £20,000, moving any other investments into his Isa in years when he does not wish to invest more cash.
Putting money into a range of investment funds is always less risky than just one and he needs to be prepared to weather volatile markets for longer than usual to see any benefit. Mr Coidan would be better off switching his current investment into a truly cautious fund such as Ruffer Absolute Return, which has a similar risk level but has performed much better and has a longer track record.
However, although these more cautious funds have performed better in recent months, it will be the more growth-oriented funds that will make the biggest recovery once the market settles, as they did in 2021.
Peter Savage. chartered financial planner at Fairstone
Generally, any savings or capital that you do not expect to access for the next five years or more can be considered for investment – provided that you are willing to accept the associated risks and enough is reserved as a rainy day fund.
Over the long term, investments should provide a real return above inflation and Mr Coidan should use whatever tax reliefs are available to sustain his savings as much as possible.
If he uses his Isa allowance, and perhaps his wife’s allowance, this will provide the added benefit of tax-free growth.
If the Isa allowance is not available, Mr Coidan could consider splitting the investment with his wife as this would allow them to benefit from the potential use of two capital gains allowances – of £12,300 this tax year – and also two tax-free dividends allowances of £2,000 a year.
Mr Coidan mentioned that he had savings in low-earning accounts and the current rate of inflation is a timely reminder to shop around for the best deals.
Central banks have been increasing interest rates in an attempt to bring inflation back down and high street banks are finally beginning to pass these higher rates on to everyday savers. As a result, some of Mr Coidan’s savings accounts are not paying the best rates available on the market.
It may be wise not to put all your capital into a fixed-term deposit right now, but instead wait and see as savings rates tick up.
Finally, if Mr Coidan has an inheritance tax liability, he could consider using some of his disposable income to fund the premiums of a life assurance policy written in trust for the benefit of any beneficiaries to cover the expected tax on his estate.
Normal expenditure out of income – giving excess income to family members – is a valuable exemption that many people do not take into consideration when estate planning. There is no seven-year “survival rule” as with many other gifts, but the gift must be made out of surplus income and not from capital or savings. Mr Coidan could take advantage of his thriftiness to give money away without the threat of IHT.
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