With inflation surging in both Spain and the UK, now is the time to review your savings and investments to establish if they are suitably structured to provide protection from this threat. Even low levels of inflation can erode your spending power over time and retirees need to plan for this.  

“Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair”.

This quote by American author and humorist Sam Ewing may make you smile, but it is a good example of the impact of inflation over the passage of time and underlines a serious threat to our long-term financial security.  

Ronald Reagan used a more hard-hitting description:

“Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man”. 

Many people do not realise how damaging inflation is to their wealth over the longer term; it is easy to become complacent after years of low levels. But it is surging in many countries, including Spain and the UK, causing concern among savers and retirees. In fact, you should always take inflation seriously as even low levels impact your wealth and retirement income over time – you may not notice the effects each year until it is too late. 

The impact of inflation

You cannot just consider inflation rates on their own, you need to compare them to your earnings. If your savings generate a lower return than inflation, the real value of your money is falling and your income will buy less than it used to.

Put very simply, and ignoring the impact of compounding, if your bank account pays 1% interest but inflation is 2%, after 10 years you will have 10% more money, but the goods and services you purchase will cost 20% more. In real terms you’ll effectively be 10% poorer.  The more time passes, the more damaging it is.

Official Consumer Price Index (CPI) figures are based on a basket of goods containing a representative selection of items for people across all ages and incomes. It rarely reflects our own personal inflation rate.  As an illustration, a personal annual rate of 4% would reduce the spending power of 100,000 (Euros or Pounds) to around 67,000 after 10 years.  After 20 years it will have lost around 55% of its value and after 30 years your 100,000 would have the purchasing power of around 30,000 today. 

High inflation in Spain

In December 2020 Spain had negative inflation, at -0.6%, but in December 2021 consumer prices rose 6.5% from a year previously, jumping from 5.5% in November and the highest rate for 30 years. The main culprit was electricity fees, but food also rose significantly in 2021. The ‘base effect’ was also a factor, which means that the figure from 12 months previously was unusually low.

Across the Eurozone, the annual inflation rate reached a record 5.0% in December 2021, up from 4.9% in November. A year earlier, the rate was -0.3%. For the EU as a whole it was 5.3%.  The highest contribution to the annual euro area inflation rate came from energy, followed by services, non-energy industrial goods and food, alcohol & tobacco.

UK inflation

In the UK CPI reached 5.4% in December 2021, the highest rate for almost 30 years. A year previously it was 0.3%.

In comparison, the Bank of England’s main interest rate was just 0.25% in December, an increase from November’s 0.1%.  It has been below 1% since March 2009.

Will inflation remain high?

Many of the factors behind the current surge are related to the pandemic and expected to be temporary.

As economies opened unevenly after lockdowns, companies have been struggling to keep up with rapidly rising demand as they rebuild their supply chains.  Shortages of many goods like computer chips and building materials have pushed prices up.

In addition, electricity prices rose sharply, hitting us both directly and indirectly as businesses pass on costs to customers.

The Bank of England expects inflation could reach about 6% by spring 2022, but then start to come down. It warns, however, that some prices may remain higher than in the past. 

The European Central Bank also expects inflation to reduce over 2022 as supply gradually catches up with demand, but warns that as the pandemic is unprecedented in modern times this recovery may be different.

One particular uncertainty is wages. Prices and wages influence each other - if wages rise to compensate for higher costs of living, companies may recoup this expense by putting their prices up, so this an area to watch.

Protecting your retirement savings

Hopefully inflation will soon fall back to comfortable levels but, as mentioned earlier, even low levels will affect you by eroding your spending power year after year.  You always need to plan to protect your savings from inflation.

To generate returns that outstrip inflation, you need to invest in assets that historically generate returns in excess of inflation over time. Reduce risk to your capital by working with a wealth management adviser to follow a disciplined investment process:

·       Establish your goals and time horizon.

·       Determine your attitude to risk – your adviser should take you through a suitability process to calculate this objectively.

·       Construct a suitable, well-diversified portfolio to achieve your investment plan and objectives.

·       Use quality investment managers.

·       Review your portfolio annually to keep it on track.

·       Be patient and stick with your plan – it is time in the market, not timing the market, that is likely to help you achieve your longer-term goals.

If you already have investments but without a carefully designed strategy tailored to your particular situation and appetite for risk, or have not reviewed them recently, look at your financial affairs to confirm if they are suitably structured to provide protection from potential future threats like inflation and taxation.

You need a tax informed investment strategy with the potential to provide capital growth higher than inflation and where your money is legitimately protected from unnecessary taxation. This can be achieved with a diversified investment portfolio, based on your objectives, circumstances and risk profile, held within a tax-efficient arrangement which is compliant in Spain.

CPI data is based on figures available on 20 January 2022. All advice received from Blevins Franks is personalised and provided in writing. This article, however, should not be construed as providing any personalised taxation or investment advice.

David Bowern, Partner, Blevins Franks

+34 952 809 212

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Blevins Franks Wealth Management Limited (BFWML) is authorised and regulated by the Malta Financial Services Authority, registered number C 92917. Authorised to conduct investment services under the Investment Services Act and authorised to carry out insurance intermediary activities under the Insurance Distribution Act. Where advice is provided outside of Malta via the Insurance Distribution Directive or the Markets in Financial Instruments Directive II, the applicable regulatory system differs in some respects from that of Malta. BFWML also provides taxation advice; its tax advisers are fully qualified tax specialists. Blevins Franks Trustees Limited is authorised and regulated by the Malta Financial Services Authority for the administration of trusts, retirement schemes and companies. This promotion has been approved and issued by BFWML.

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