Amid high interest rates, cash has also become more attractive.
“With regards to saving for retirement, for the first time since I’ve been doing this job in 14 years, people are seeing cash as a viable asset class for some growth, for saving, because we’re getting some decent returns now,” says Nji Lorimer, director and chartered senior wealth planner at SG Kleinwort Hambros.
Should double-digit inflation become a long-term assumption?
Although UK inflation is the highest since the 1970s, Church at Investec highlights how the inflation target remains at 2 per cent. “Over the longer term, we should continue to look more towards a lower and more conservative assumption for inflation.
“A double-digit inflation figure over the longer term will be unsustainable for a huge number of households. That said, in the shorter term, we should be factoring in these increases to any assumptions and only time will tell the effect of such a high level of inflation on our clients' retirement plans.
“Annual reviews are essential to keeping clients informed and being able to discuss what changes may need to be made in the run up to retirement.”
Cook at Quilter likewise says that a double-digit inflation figure should not be used as a long-term assumption going forward. “I don’t think it should be used as a plan because it could become a detractor for people to save.
“If I’m to build a cash flow model with a double-digit inflation assumption inside it, and a typical investment return assumption of 5 per cent, I would actually be showing a client that they could never possibly ever retire, and that they’re never going to be saving enough money into the pot.
“So I think we need to take a more pragmatic view of what inflation might look like.”
Indeed, a survey by advice firm My Pension Expert found that the cost of living crisis had made retirement seem impossible for more than half (55 per cent) of adults, says Lily Megson, the firm’s policy director.
Assuming a double-digit inflation figure may not be “pragmatic” for the long term, but Cook adds that a higher inflation figure could be included in a discussion with clients.
“Whereas historically in my cash flow modelling I’ve used 2.5 per cent as an inflation assumption, maybe my baseline might be 3 per cent.
“Where historically I’ve not really shown this to clients, you can toggle the inflation switch and say, ‘Based on what you’re saving at the moment, if inflation runs at 3 per cent, you’ll be fine to retire at 62 or 63. However, if inflation is higher than what we’re expecting, if inflation remains at 4 or 5 per cent, what that means to you is, we’re going to need to delay retirement from 63 until 65.’
