top of page

3 important ways that rising inflation could affect your progress towards your financial goals

In recent weeks, you can’t have missed the headlines that the UK is now experiencing the highest level of inflation in three decades. According to figures from the Office for National Statistics (ONS), the Consumer Price Index (CPI) rose to 6.2% in the year to February 2022.

This is more than triple the Bank of England’s annual target of 2% and may rise even further as the war in Ukraine affects the price of food and fuel. Of course, while a small amount of inflation can help keep the wheels of the economy turning, too much could have a damaging impact on your wealth.

If you want to know more about how it could affect you, read on for the three important ways that rising inflation could affect your finances in coming months.

1. It will reduce the real value of your cash holdings

As we often say, one of the most significant ways that inflation can affect you is that it acts like a ‘silent thief’, stealing the real value of your money over time. Essentially, if your wealth isn’t growing by as much as the increase in prices, its buying power is being slowly eroded.

While it can often be sensible to keep some of your wealth in cash to act as an emergency fund, holding too much of it in this way can leave you dangerously exposed to the effects of inflation.

According to data from Moneyfacts, the highest interest rate for an easy-access savings account as of 30 March is just 0.95%. This is significantly lower than the rate of inflation, and so the buying power of any money you hold in cash is being slowly eroded.

A useful tool to see the impact of this over time is the Bank of England’s inflation calculator, which allows you to compare prices from different years.

For example, in 2021 it would have cost you £22,844 to buy the same goods and services that cost £10,000 in 1991. That’s due to an average rate of inflation of 2.8% over those 30 years.

2. Your investments may need to work harder when inflation is high

Another important way that rising inflation could affect you is that it reduces the real returns on your investments. Even if they may show a reasonable rate of growth, their real value may not be increasing by as much as you may think.

For example, if an investment grows by 6% while inflation is at 5%, then its growth in real terms is only 1%. So, you may find you need to reassess whether your investing strategy is still right for you.

In general terms, the greater the amount of risk you are willing to tolerate when investing, the larger your potential returns. This can help you to maintain your progress towards your financial goals even during periods of high inflation.

Of course, it’s also important to note that exposing your wealth to greater risk can see the value of your investments fall during periods of volatility. This is why it’s crucial to be able to make properly informed decisions when investing.

If you want to be confident that you’re on track to reach your long-term goals, it’s important to make sure that your investments are working hard for you.

3. It could affect your pension wealth

Retirement is typically seen as a time to relax and enjoy the rewards of all your hard work. This is why it’s important to have enough to support your desired lifestyle throughout this period.

The Lifetime Allowance (LTA) is one of the most important limits to be aware of when building your long-term wealth. This is because it is the maximum amount that you can contribute to your pension in a tax-efficient way.

However, in his March 2021 Budget, chancellor Rishi Sunak announced that the LTA would remain frozen at £1,073,100 until at least 2026. This is where inflation may pose a problem for you.

Even though the allowance remains frozen, it’s likely that your earnings (and so your pension contributions) will continue to rise over the next few years. If your income rises with inflation, but the LTA stays constant, you may exceed this limit.

This is especially true when you consider that the total value of your fund includes not only your contributions, but also any tax relief or investment returns that you may receive.

Breaching this threshold means that you may have to pay a tax charge when the time comes to draw income from your pension. This is where seeking professional advice can benefit you.

We can help you to deal with LTA issues, giving you more confidence that you’ll have enough income in retirement to enjoy the lifestyle you want.

For example, we may recommend withdrawing your excess pension as income, rather than as a lump sum to reduce the tax charge.

We can enable you to minimise your tax liability when building wealth for retirement. This can give you much greater peace of mind to know that you’ll have enough to support the lifestyle you want.

Get in touch

If you’re concerned about the impact of rising inflation and want to know more about what you can do about it, we can help. Please email us at or call us on 0208 882 2979.

Please note:

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

126 views0 comments


bottom of page