Are your savings being eroded by inflation?
More than half of investors are worried about inflation, but don't know how to protect their savings from its effects.
A survey of 1,000 investors by online investment management service Nutmeg has found one in six people don't know how to stop their money being eroded by inflation.
Tony Stenning, head of UK retail at BlackRock, points out that savings could be more than halved in just 25 years if investors leave their money in cash. Research by the company found £100,000 would have the purchasing power of just £47,761 after 25 years and a massive £14,000 would be eroded away in just five years.
Nutmeg's findings reveal that although 51% of UK investors understand rising inflation is affecting the outlook for their savings and investments, just 23% intend to review their portfolio to try to improve the situation. Worringly few - just 8% - would consider increasing their risk appetite.
Darius McDermott, director at Chelsea Financial Services, says investors want "the holy grail".
"Clients want good capital and income returns with no risk. But cash is no longer risk free; it is actually a potentially dangerous asset class.
"Investors shouldn't be afraid to move up the risk scale but they do need help to do it," he adds.
But forward guidance from the Bank of England does seem to have spurred some investors into action. McDermott says Chelsea has seen an increase in transfers from cash Isas to stocks and shares Isas since Mark Carney revealed the Bank's intention to keep interest rates lower for longer.
Barclays Stockbrokers has seen a similar pattern. Research by the broker has revealed 50% of investors intend to move their money away from cash and into an investment vehicle.
Alastair Thaw, head of products at Barclays Stockbrokers, says Mark Carney's comments have reminded people that their money needs to work harder. "Apathy won't be rewarded in this financial climate," he adds.
McDermott says in shifting investment portfolios, however, investors should be "careful to avoid the trap of expensive equity income stocks". He thinks absolute return funds may shine in the current environment.
This article was written for our sister website Money Observer
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Absolute return funds
Absolute return funds aim to deliver a positive (or ‘absolute’) return every year regardless of what happens in the stockmarket. Unlike traditional funds, they can take bets on shares falling, as well as rising. This is not to say they can’t fall in value; they do. However, over the years, they should have less volatile performance than traditional funds.