Inflation is taking hold of the U.K. and people are concerned. Nearly each year since 1958, we’ve seen annual increases in prices and this trend is not expected to stop. Factoring in inflation can and should be part of your investment plans. But in order to understand how, we must determine what the effects will be.
First, we will discuss pensions. City A.M. ran the numbers on the decrease in value of pensions over time; they concluded that a £4,000 withdrawal today would only be worth £2,692 in twenty years and £1,516 in forty years at the current rate of inflation. This means contributions today need to increase in order to mitigate the effects of inflation. However, to maintain the value of your pension at £4,000 a year, your contributions during your working life would need to increase from £1,000 to £3,000 annually, out of range for most individuals.
Next, it is important to understand the effects of borrowing money. Rates have stayed at an historic low for the past decade, but this will likely change toward the end of the year. As The Guardian reports, “Financial markets now suggest there is a 42% chance of a rate increase in November, up from just 18% a week ago. The odds on a December rise are now 54%.”
Inflation affects all aspects of life. The cost of most goods will continue to rise, so you can expect household costs to increase at a steady pace.
Against this background of inflation attacking the value of our pensions and the assets we hold, and increasing our household costs, there are some defensive measures you can take to mitigate the impact of inflation. Investing for fixed returns well above inflation should rank highly on your list.
Regardless of your current investments, it is crucial to reevaluate your plans for the future and factor in inflation. It is one area of investing that can sneak up on you, and you cannot afford to be caught unprepared.
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