The rising cost-of-living has become of the most discussed economic and political problems over the last 12 months.
It has impacted many different people across the world – as some are left with huge decisions to make with paying bills and food shopping becoming difficult.
In the financial advice world, the rising cost-of-living crisis has become a problem for every type of client from accumulating young investors to decumulating retirees.
According to research from Charles Stanley, 40% of retirees are worried about their retirement provision due to the continued rises in the cost of living. Some 46% of retirees said they are supplementing their income in other ways to ensure they have enough money throughout their retirement.
This coincides with Interactive Investors’ Great British Retirement Survey which found 56% of Brits aged under 66 have curtailed their saving due to rising bills and costs.
But advisers know that they can be a helping hand for advice clients. According to Royal London, 66% of advisers said their main role through the cost-of-living crisis is to provide reassurance and peace of mind for clients.
Support provided through financial advice helps reduce worry by more than half – 21% of advisers said their clients are anxious about the cost of living, compared with 46% of the wider population.
International Adviser spoke with a number of firms involved in the financial advice industry to discuss the impact of the crisis, advisers’ role and priority for saving.
Impact of crisis
Gillian Hepburn, head of UK intermediary solutions at Schroders, said: “Back in May 2022 in the Schroders Adviser Survey, 65% of advisers told us that they expected some of their clients would have to alter their investment plans as a result of the cost-of-living crisis and in November, 53% reported that some clients had begun to do so.
“We would not be at all surprised to see this number rise further as people absorb the impact of much higher winter fuel bills, soaring food prices and other inflationary factors on their household finances.
“With 1.4 million households in the UK facing the prospect of interest rate rises when they renew their fixed rate mortgages in 2023, many younger clients in particular will also have higher housing costs to contend with.”
Andrew Tully, technical director at Canada Life, added: “It’s no great surprise that the cost-of-living crisis means many people are starting to dip into their pensions to make ends meet. It’s completely understandable that people are prioritising heating and eating above their savings at this difficult time.”
The sad fact that many have stopped investing or saving should be a concern for many in the advice sector.
The priority of saving should be a necessity – but unfortunately life costs are becoming too much so they take from pots and think about the short term not their retirement goals.
Alex Holloran, wealth planner at Kingswood, said that younger investors brushing aside saving and retirement is not the “biggest problem if you have other priorities that could be equally valuable in the long run”.
He said: “For example, if you have excess funds then overpaying your mortgage, either to take advantage whilst it’s on a lower rate or if it’s already gone up clearing more of the capital to pay it off earlier.”
The biggest issue about saving priorities is that the discussion turns to cutting down on subscritopjn and luxury items – which seems to take precedent over retirement plans.
Holloran said this was “possibly because the idea of building significant savings feels unobtainable and frankly the maths”.
“For example – if someone buys a coffee out everyday, which costs £4, that’s £1,460 a year on coffee – if they want to buy a house, they’ll need roughly a 20% deposit,” Holloran added. “The median house price in England and Wales is £270,000 ($340,000, €310,000) so they need £54,000.
“They’ll need to give up buying coffee in the morning for over 36 years or 13,500 coffees. Is it any wonder people have given up hope of saving enough and prefer a short term treat?”
The cost/benefit analysis of spending and cutting down can be explained very well by experts like advisers.
They can speak to clients and educate them on financial planning.
Schroders’ Hepburn added: “At times like this, professional advice is particularly important as it can ensure that any changes that are made to financial plans do not have too great an impact on long-term objectives.
“Advisers can also help older clients to understand how best they can maintain their capital and generate the income they need alongside other requirements they may have such as acting as the Bank of Mum and Dad.”
Canada Life’s Tully added: “There also needs to be an awareness that if many people withdraw much of their pension now then it won’t be able to provide retirement income for all of their retirement, so there may be more pressure on state pensions and other benefits in later life. Using the home as an asset may increase in later life as a result.”
David Owen, wealth proposition director at The Openwork Partnership, said: “We rightly concern ourselves with vulnerability and we ought to be rigorous to ensure that clients are financially coached, using the granular level of their income and expenditure, ensuring that we provide the necessary challenge.
“More than ever, we must be the Marie Kondo of financial planning and ensure that our clients are spending wisely and with meaning and purpose. Those of us who have been around the block a few times will have called this ‘money queue planning’.”