With UK inflation, as measured by the consumer price index (CPI), climbing once again to a 30-year high of 6.2% in the 12 months to February, according to latest ONS statistics, it’s time to take a fresh look at what steps we can all take to protect our wealth from the eroding effect of price rises.
As the cost-of-living climbs, so you too must up your game if you are to keep inflation from lessening the real value of your savings and your household bills at a manageable level.
We’ve put together five essential tips to give your finances what may be an overdue spring clean.
1. Review your cash savings
Beyond your everyday current account, how much do you have saved up in other savings accounts, and can that money be working harder for you? While interest rates may now be on the rise – a response from central banks to combat inflation – that doesn’t necessarily mean that the interest on your savings account will rise too.
Data from Moneyfacts suggests you’ll struggle to secure an Annual Equivalent Rate (AER) of anything above 1% on easy access savings account today, with many falling below the 0.75% Bank of England base rate.
Providers also offer slightly higher rates to investors who are willing to lock their money away for several years, but these too are not necessarily a good way to protect your wealth from inflation – the current best rate for five years is 2.3%, but this may not be such a good idea with inflation above 6%.
2. Take advantage of your ISA allowance
Taking advantage of your annual ISA allowance (currently £20,000) could be a better idea given that you will not pay tax on any interest or returns accrued. While the market for easy access cash ISAs is somewhat flooded with many banks and building societies – and even supermarkets – willing to take your money, it’s arguably not especially competitive. Moneyfacts found the average cash ISA offered a rate of just 0.51% between February 2021 and February 2022, again below the rate of inflation.
The average return from a stocks and shares ISA in the same period was 6.92% according to the same research, though unlike a cash ISA this is not a fixed amount, but an indication of how stock markets performed over those 12 months.
Nutmeg’s investment portfolios – available across different risk levels, and across different investment styles – offer the potential to deliver above inflation level returns with the caveat that investors should consider a longer timeframe for investing as returns can be volatile and, particularly in shorter time–frames, you may not get back what you originally invested.
Beyond the standard stocks and shares ISA, investors may also consider where appropriate the Lifetime ISA, the Junior ISA, and personal pensions.
3. Review your utilities bills
While the underlying reasons behind the current inflationary cycle are varied, an important factor today is elevated energy prices which have been exacerbated by Russia’s invasion of Ukraine.
After the energy price cap rose in October 2021, consumer prices for gas and electricity climbed by 17.1% and 8.7% respectively, according to the ONS. Currently 12-month inflation rates for gas and electricity are at their highest level since early 2009, with gas at 28.1% and electricity at 18.8%.
From 1 April, the energy price cap will increase again for approximately 22 million customers, according to Ofgem. Those on default tariffs paying by direct debit will see an increase of £693 from £1,277 to £1,971 per year (difference due to rounding). Prepayment customers will see an increase of £708 from £1,309 to £2,017.
Switching supplier can be a logical option, though the price cap has made getting a better energy deal much harder than in the past. However, that shouldn’t stop you taking time to look at ways to be more energy efficient that can both reduce your bills and your carbon footprint.
Still, utilities bills are not just about energy, and switching can still be well worth the effort in other more competitive markets; maybe it’s time to look at your broadband package or your mobile phone contract?
4. Fix your mortgage or consider a Lifetime ISA
With the Bank of England currently in a rate hike cycle, any interest rate rises will impact homeowners who are currently on Standard Variable Rates (SVRs). Those looking to re-mortgage to more agreeable fixed-rate deals may want to act sooner rather than later, remembering that lenders usually let you re-mortgage six months before your current term finishes.
Those on longer-term deals may want to investigate the option of overpaying – most mortgages allow you to overpay by up to 10% per year, which can be a sensible option today as inflation continues to trend upwards.
For others, the dream of being able to afford your own home may still be far off, though that shouldn’t stop you from saving towards a deposit. For UK residents aged 18-39 and saving for their first home, a Lifetime ISA (LISA) can be an ideal option. Provided the account is open and your first contribution is made before the age of 40, you can contribute up to £4,000 each year until the day before you turn 50.
The government will give you a 25% bonus on every contribution you make, though you must use the accumulated wealth to either buy your first home worth up to £450,000, or to keep it until you turn 60. If you withdraw for any other reason (except terminal illness) then you will face a 25% penalty charge on the whole amount.
Nutmeg clients can open a stocks and shares LISA with a choice across investment styles and risk levels, all with the potential to deliver above-inflation returns.
5. Start a regular investment plan
It’s a stark reality that the best way to protect your wealth from the effects of inflation is by making a conscious effort to make your money work harder. As household budgets become more and more squeezed by price rises (which continue to outpace wage growth), putting a lump sum aside for the future may not necessarily be feasible. Still, even the smallest monthly contribution to an ISA, pension, or general investment account, can grow provided you set your risk level and time horizon in line with your needs and are patient and disciplined enough to invest throughout potentially volatile periods. As with any form of investment, however, there remains a risk of losing money.
Why choose a wealth manager like Nutmeg?
With Nutmeg, you can start investing with as little as £100 for a Lifetime ISA and Junior ISA or £500 for ISAs, general investment accounts and pensions. Regular monthly contributions can then be set up at an amount you can afford.
We know that price rises are a concern for Nutmeg clients, which is why we strive to keep you informed on the latest developments. If you haven’t already, make sure you read Brad Holland’s latest blog on the underlying reasons behind rising inflation, and whether this will be a long-term concern. Annabelle Williams has also written a blog explaining what rising interest rates mean for your money. The latest economic developments and data is also regularly covered by our team in our investor updates, and mid-month view from the investment desk.
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future performance. Tax treatment depends on your individual circumstances and may be subject to change in the future.