Read more: http://www.dailymail.co.uk/money/article-1350497/Act-protect-savings-inflation.html#ixzz1C7z1VPya
Soaring inflation is ravaging the savings of everyone who has put money aside for a holiday, wedding or rainy day. But those on fixed incomes - especially pensioners - are suffering most. Here, we investigate when inflation may be brought under control and how you can protect your capital.
What is inflation?
InflatIon shows how fast prices of everyday goods and services are increasing. It is running at either 3.7 pc or 4.8 pc a year, depending on which measure you believe.
This compares with a government target of 2 pc. Inflation of 4.8 pc means an item that cost £1 a year ago is likely to cost £1.05 today. the higher measure is the retail prices index (RPI) that has been monitoring prices since June 1947.
The lower measure is the consumer prices index (CPI), which was launched in 1996. this, unsurprisingly, is the one the Government prefers to quote.
To measure these inflation rates, the office for national Statistics employs market researchers who use hand-held computers to log the prices of 180,000 different items at shops, supermarkets and markets every month. these are supposed to reflect the most common items on which households spend money, from fish fingers to petrol; bottled beer to car park charges.
Many goods and services measured by RPI and CPI are the same, but the key difference is that RPI includes council tax and mortgage costs.
The items measured are changed as our tastes change. for instance, last year hairdryers were replaced with hair straighteners, whi le disposable cameras were taken out because people take photos on their mobile phones or have digital cameras.
Will it keep rising?
Economists suggest inflation will continue to rise while Bank of England base rate and wage rises will remain low. CPI won't fall to the Government's 2 pc target this year.
Professor Andrew Clare, of the City of london-based Cass Business School, says: 'Inflation is climbing as the cost of imports, such as food and commodity prices, rise and the Bank of England can't control that. the increase in Vat is also pushing inflation up.
'Once this works its way through the system at the start of next year, inflation should fall - as long as there are no more nasty shocks.'
Professor Peter Spencer, from the Ernst & Young ITEM club which bases its forecasts on the economic model used by the treasury, agrees.
'Households are under fantastic pressure, as inflation has been a serious problem for 12 months,' he says. 'as soon as commodity prices stabilise and the VAT increase drops out of the annual figures, inflation will drop back towards the Bank of England's target.'
But there is a danger of it climbing even higher before then. Capital Economics forecasts the CPI rising to 4.2 pc in the next couple of months and, if commodity prices keep climbing, it could break through the 5 pc barrier.
Samuel Tombs, UK economist at the firm, says: 'there are clear signs that CPI will stay above 3 pc until the end of this year. We will not see a big fall until 2012.' normally, savers can expect some cushion against inflation as the
Bank of England pushes up interest rates to control it. However, most economists say base rate is unlikely to rise by much, if at all, this year. they argue that the UK economy is weak - and not the source of inflation we are suffering. therefore, any increase in interest rates could further weaken the economy.
Mr Clare adds: 'If the Bank of England puts up interest rates, it will harm our already weak economy. there could be a small rise in base rate in the second half of this year, but it will only be 0.25 pc and nothing for savers to get excited about.'
What it means for savers
The scenario of rising inflation and stagnant interest rates makes grim reading for savers, who've already suffered two years of miserable returns.
Even the top-paying accounts cannot protect their money. With inflation of 4.8 pc as measured by RPI, basic-rate taxpayers need to earn 6 pc just to maintain the spending power of their savings. Higher 40 pc payers need 8 pc.
Both figures are impossible to achieve on risk-free savings accounts. Even if they opt for tax-free cash Isas, into which they can put £5,100 this tax year, they will lose out.
The top rate, available only to those who tie their money up for four years, is 4.25 pc from Halifax. the one hope for savers is that banks are finding it difficult to raise the money they need on the money markets, so are having to turn to savers.
This has sparked fierce competition with certain banks such as northern Rock and lloyds (through offshoots such as BM Savings) offering far higher rates than they normally would when base rate is this low.
Even so, the top rates won't protect you against inflation. on easy-access accounts - even the best rates, 2.9 pc before tax with the Post office online Saver run by Bank of Ireland - basic-rate taxpayers will lose out to the tune of 3.1 pc a year at the current rate.
Even at this top rate, the spending power of each £100 will drop to £96.90 in just 12 months if inflation remains unchanged. In an access account paying an average pc, the value of £100 will plunge to £95.43 in today's money. Even on lower CPI running at 3.7 pc, basic-rate taxpayers need to earn 4.63 pc and higher-rate payers 6.16 pc - and these figures will rise as inflation climbs.
What it means for pensioners
InflatIon is particularly devastating for pensioners on fixed incomes.
The vast majority buy a level annuity with their pensions savings when they retire.
This will pay a fixed income until they die.
Interest rates offered on annuities plumbed record lows last year, falling to half the level of 15 years ago. Inflation rapidly erodes the spending power of this already meagre income.
An average pensioner retires with a pot of £26,000. this will buy an income of just £1,608 for a 65-year-old man.
If inflation - as measured by RPI - remains at 4.8 pc for the next 20 years, the spending power of this income will be just £659 by the time the pensioner turns 85.
Even using the lower CPI figure of 3.7 pc, it would be worth £814 by age 85. there is very little pensioners can do but cross their fingers and hope inflation starts to fall. Pensions designed to retain their spending power are poor value.
You can buy an inflation-linked annuity that pays an income that rises each year in line with inflation. the catch is you receive a lower income in the first place and are likely to be short-changed on your pension by the time you die. for example, a 65-year-old man with a £100,000 pension pot can currently get an annual income of £6,474 from a level annuity. the starting income drops to £3,951 if you buy an annuity linked to RPI inflation.
If inflation fell to 3 pc and remained at that level, you'd have to live to 100 before total payouts matched those received by the level annuity.
According to independent financial adviser (IFA) Hargreaves Lansdown, inflation would have to run at 5.2 pc for 20 years for an inflation-linked annuity to match the total payouts from a level annuity.
An alternative is to buy a pension with limited protection against inflation. You could opt to take an annuity that rises by a fixed amount - for example, 3 pc - every year.
Even then, your initial income would drop from £6,474 to £4,583 and would only match total payouts from a level annuity at age 89. Laith Khalaf, from Hargreaves Lansdown, says: 'You can buy an inflation-linked annuity, but you have to take a big hit on the initial income, and inflation has to run quite high to make it worthwhile.'
If you're willing to risk your cash
If you're willing to risk losing some of your capital, there are three main options open to private investors: corporate bonds, shares and gold.
Corporate bonds: Holding stakes in sound, well- financed companies around the globe is probably the least dangerous strategy.
You can do this through investing in a corporate bond fund. Corporate bonds are actually IOUs issued by companies who want to borrow money.
They pay a fixed rate of interest and promise to return the money lent to them at a future date.
But beware: if inflation takes off and interest rates rise, then the price of investment-grade corporate bonds - those issued by the strongest, best-financed companies, and bonds issued by governments - will fall. this is because the fixed interest they are paying looks less attractive.
Even if market speculators think interest rates are likely to rise, these bond prices will fall. for the time being, investors should look at strategic bond funds rather than the safer corporate bond funds.
These are more agile - extremely important in unsettled times.
They can switch between corporate bonds and high-yield bonds, hold cash and even bet on prices falling. they are more risky, but you also have a greater chance of making a capital gain.
Mark Dampier, investment director at Hargreaves Lansdown, says: 'Strategic bond funds give the manager more leeway and options if things go wrong. I would spread my money over several of these funds rather than putting all my money into just one.'
He picks M&G optimal Income, Jupiter Strategic Bond fund and old Mutual Global Strategic bond. the income alone - M&G pays around 4 pc - will not completely protect you from inflation, but your chance of making a capital gain could.
Shares: If you can sleep at night knowing your money is at risk, then shares can provide a hedge against inflation and an income. But you can lose money.
Amanda Davidson, director at IFA Baigrie Davies, says: 'We are starting to see an increasing number of investors asking about inflation, particularly those living on a fixed income. Shares are a traditional hedge against inflation because there is a chance of capital growth, but they carry more risk than cash or bonds.'
She advises a broad allocation that is weather-proof in all conditions. on bond funds, she likes Henderson Strategic Bonds fund, M&G optimal Income and old Mutual Global funds. for shares, she picks Schroder UK alpha, BlackRock UK alpha and M&G Recovery in the UK. Her international choices are first State Asian Pacific leaders and Aberdeen Emerging Markets.
But Mr Dampier warns: 'Shares don't like the transition period of rising inflation, and prices often fall as it goes up.'
But he thinks over the long term, investment funds that hold strong companies and invest for income should do well.
Funds investing for income have underperformed in the past couple of years because they do not invest in mining shares that have been given a sharp boost from rising commodity prices.
He picks Invesco Perpetual Income, Artemis Income and Psigma Income.
Gold: Commodity prices have shot up since the credit crunch, but now there are fears that with the Chinese economy starting to flag, demand will fall.
But gold, the price of which shot up by 29 pc last year, is expected to carry on up. Anthony Bolton, who runs fidelity's China Special Situations fund, says: 'Gold is more like a currency than a commodity. It is the only commodity worth buying.'
Demand for gold could rise as investors fear the value of currencies will fall. for example, the U. S. government continues to print money. that means there are more dollars around, so they lose their value.
Mr Dampier likes BlackRock Gold & General fund. He says: 'this is not a fund for widows and orphans, as the price is so volatile. You should hold a maximum of 5 pc of your portfolio in the fund.'
Keep up with the latest news on inflation and rates at www.thisismoney. co.uk/economywatch
No comments:
Post a Comment