By Simon Harryman, Senior Business Development Director at Ingenious
The 1970s was seen as the last period of sustained high inflation – a time when many of those that were starting out in adult life but now find themselves in later life.
However, this new period of high inflation in which we now find ourselves is markedly different from the last, it is worse in many ways and in particular for those in later life. A perfect storm of rising costs and poor returns is hitting middle England, a group that is already being squeezed due to changes in age and gender related demographics and lifestyle.
Before considering how advisers may be able to help them, let’s firstly consider the pressures they are under.
The Real Return Crisis
Whilst inflation has yet to hit the peaks of the 1970s and early ‘80s, as I have mentioned it is at its highest point in more than 30 years. That’s where the similarities end though. In May 1982 bank base rate was 13.13% (2), so savers were still seeing a real rate of return of 1.13% per annum. Contrast that with May 2022 where we have a bank base rate of 1.0% (2) and a real terms loss of 10.1% per annum. A swing in annual real rate of return of c.11.23% is huge
Savings and income are being eroded at an unprecedented rate at a time when most tax allowances and thresholds have been frozen, adding to the squeeze. But prices of goods and services increase at differing rates, the rise in the costs of essentials is disproportionately great and therefore is hitting those hardest who can least afford it.
The Care Crisis
The cost of care provision is already eye-wateringly high, and will remain so despite the forthcoming care cap. However, it’s almost impossible to see how this won’t get worse still when you consider that the core costs of care provision are human resource, food and energy (heat) all of which will likely be at the higher end of the inflation basket.
Rising costs, paired with eroding savings mean that care provision could become even less affordable for many, and this will inevitably mean that many middle-aged workers will be forced to provide care for their elderly relatives whilst still working, and likely still providing a home for their children who are unable to get on the housing ladder.
This is already becoming a significant problem as 22.3% of workers aged 50-59 are also providing care to others. This rises to 23.9% for workers aged 60-69. If, as seems likely, this is happening because the costs of care are skyrocketing, then these numbers will only increase as costs continue to rise and inflation takes further hold.
Medical advancements mean that people are living longer, which we all hoped would be a good thing. Unfortunately, this is just adding fuel to the fire. Longer lives are not necessarily healthier ones. Recent statistics from the ONS show that, on average, males will spend 16.2yrs of their lives in poor health, and females even longer at 19.4 years. Increased life expectancy simply increases the need for care provision, putting even more pressure on the care system, those working as well as caring and it becomes a vicious circle, people will increasingly need support whether that be financial or guidance.
Perfect storm for the squeezed middle
The wealthy can frequently escape these crises relatively unscathed as they have sufficient resources and access to professional support and guidance. Those with little in savings or assets are also not likely to feel the full effects of these challenges as they are often supported by the state.
It is those in the middle who are most likely to feel the pain, and who will have to adapt the most by making changes and re-plan their finances. Those that had planned to leave their savings to their children may now find that they need to repurpose those funds to meet their own needs – not to mention possibly funding care for their own parents. This may lead to dipping into savings to meet costs which previously would have been covered by income.
Given all the challenges they face, there has never been a time when middle England has had a greater need for advice, and yet only the minority actually seek it, as evidenced by the UK Advice Gap Report by Open Money (7). Without advice, this group could be making mistakes that put them even further behind in meeting their financial goals.
What can the financial services industry do to help?
All stakeholders need to help increase the visibility of and access to advice. It is also incumbent upon all parties to be proactive and not to freeze in the face of this financial pandemic. There are some very specific things the financial industry can do to help clients achieve the best possible outcomes for themselves and their loved ones.
· Build plans which are flexible enough to adapt to any eventuality
· Research processes and panels need to be updated more regularly to ensure that solutions can meet the changing needs of clients, and reflect changes made by product manufacturers
· Recommendations must be laser-focused on clients’ required outcomes, and supported by facts rather than opinions; research that demonstrates how good outcomes will be achieved
· Instigate and then facilitate discussions amongst families which are often difficult to get started
· Utilise allowances and exemptions wherever possible (eg Business Relief, EIS, Investors Relief)
Product providers / investment managers
· Build flexibility into product design to allow for changes in circumstance
· Ensure costs are managed responsibly so product charges are appropriate and minimised where possible to avoid drag on performance
· Deliver more holistic products which Include added value services, such as advice and support, where appropriate
At Ingenious we are committed to helping advisers through education and support but also by developing innovative solutions which aim to deliver greater certainty and peace of mind for advisers and their clients
Never has there been a time when clients have needed their advisers more. Advisers have a vital role to play by making sure they understand the pressures their clients are facing, how those might change and what solutions are available to help them by staying on top of developments and working proactively with product providers to fully understand how they can support them now and into the future.