Even though the economy has been experiencing deflationary pressures, investors should be very mindful of the return of inflation and the need to factor this into their future plans. Even though inflation may take longer to reach the government’s two per cent target, once there, it could start to rise quickly. As we know, prevention is always better than cure, so what should you be considering today to protect yourself from the return of inflation tomorrow?
Currently, if you receive income from cash or gilts (government bonds) you could see this income in real returns fall considerably with the return of inflation. One prevention measure would be index-linked gilts, offering yields that rise in line with inflation. However, depending on the level of inflation, it may be more appropriate to hold conventional gilts instead. Alternatively, savings certificates from Treasury-backed National Savings and Investments (NS&I), also guarantee to beat inflation. They pay a tax-free percentage over RPI over three or five years.
If you are planning to retire over the next few years you may consider exchanging your pension fund for a level-term annuity that will pay you a fixed monthly sum for life. But if you have concerns about the effects of rising inflation during your retirement and the impact this would have on your standard of living, you could purchase an annuity that increases in line with the retail price index (RPI). If this is the route that you decide to take you need to be aware that this option will initially provide a lower starting payment than a level annuity. An alternative is to split your fund and purchase a level annuity with one half and an RPI-linked product with the other.
The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not an indication of future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.