Guides
Maintaining your purchasing power The recent rise in inflation to its highest since Labour came to power in 1997 affected savers, pensioners and homebuyers. For many the "real" value of their life savings eroded because after tax their earnings are increasing by less than even the Government's lower measure of inflation - the consumer price index (CPI). The purchasing power of pensioners could also be gradually eaten away. The retail price index (RPI) inflation figure, which is the measure used to adjust index-linked pensions for inflation, recently hit its highest level since July 1991, as a result not just of higher oil prices but also rising food costs. However the "true" rate of inflation for pensioners increased to nearer double the official figure - so many people in retirement may see their spending power dwindle year after year as even inflation-proofed pensions fail to keep pace with the actual increases in pensioners' costs of living. Borrowers may also have to brace themselves for another interest-rate hike as the Bank of England tries to control UK inflation, which increased to the highest of any major European economy. Several lenders have pulled their fixed-rate loans, which protect borrowers from further rises in interest rates, in preparation for a potential rise in the cost of borrowing. Those who remember the days of rampant inflation in the 1970s - when inflation peaked at over 24 per cent in 1975 - may feel that today's rates are nothing to worry about. However, over time even low inflation can have a big impact. Someone retiring on a £10,000-a-year pension in 1985 would, 25 years later, require a pension of more than £28,700 to provide the same purchasing power. Even over the last five years, when inflation has been running at an historic low, the purchasing power of the pound has fallen by almost 15 per cent. However, with careful planning, it is possible not only to inflation-proof your pocket, but also to beat inflation. Check the interest on your savings accounts. Consider opting for a tax-efficient individual savings account (ISA) and index-linked investments. You could use income-generating shares in the hope of both capital growth and inflation-busting dividend increases. Protect your mortgage against rising rates with a fixed-rate loan. Lower your expenses by switching energy suppliers. Inflation-proof your pension and life cover by index-linking contributions and cover. Don't let your standard of living dwindle in retirement - opt for an index-linked annuity or use a portfolio of income-generating investments to help keep on track. |
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