Investing in a new era: Are your clients’ portfolios protected against inflation?

Inflation is at a 40-year high of 9.4% and expected to go higher this year. Despite projections that inflation may come down next year, we believe rising prices are here to stay for longer.

Now is the time for financial advisers to review their clients’ investments to ensure they are suitable for this new era of higher prices.

Below we explain factors we believe financial advisers need to consider.

Why is inflation rising?

UK inflation rose to 9.4% in the 12 months to June, its highest level since 1982, and the Bank of England believes inflation could hit 11% within the next few months.

Inflation is currently being fuelled by higher oil and gas prices, as well as rising food costs and higher prices of raw materials.

Although the Bank of England expects inflation to slow next year, the price of some goods and materials are expected to stay at a high level and may never drop back to past prices.

What does this mean for investors?

Investors have long been used to low interest and low inflation rates. Until this year, annual inflation had been below 3% for the past decade and interest rates were also at rock bottom throughout this time.

For Britons looking to mitigate inheritance tax, estate planning services have navigated the low inflation and low interest environment well over the past decade – offering their clients steady, secure returns, albeit with a low yield.

The key draw of an estate planning service is that investments should qualify for 100% inheritance tax relief if the shares have been held for at least two years. Shareholders naturally also want their investments to increase in value too, and this is easier to achieve when inflation is low.

But with inflation having rocketed in the past year – and expected to remain high for at least the next six months – the issue now is whether these services are still effectively meeting investors’ needs.

UK solar: an opportunity to protect against inflation?

Investing in UK solar could provide savers with protection from inflation.

The UK solar industry is still benefiting from the Government’s Feed In Tariff scheme, which guarantees inflation-linked payments to producers of renewable energy.

Although the scheme closed to new solar projects in 2016, the tariffs apply for up to 25 years so this means producers are still benefiting from subsided, inflation-linked income. This income is passed on to investors in the projects – meaning they benefit from reliable returns that rise in line with inflation.

It’s why we at the ProVen Estate Planning Service (PEPS) place such an emphasis on solar investments. As well as reliable returns for our investors, there is also the opportunity for inheritance tax (IHT) relief as a solar investment could qualify for business relief, meaning the investment should be IHT-free after two years.

With inflation continuing to surge, and no signs of a slowdown on the horizon, it is paramount that investment returns keep pace with levels of inflation

For our investments, where Government subsidies no longer apply, we negotiate new long-term 25-year contracts with businesses, locking in a deal that commits them to paying an RPI-linked price for the energy we produce and sell to them.

This means our investments are stable, and we benefit from reliable income, linked to inflation, that we pass on to investors. And we are consistently tracking ahead of our target returns – over the past 12 months, the blended growth across PEPS has been more than 8%.

It is important that financial advisers take the time to think about the proportion of their clients’ portfolios that are invested in assets that could benefit from rising inflation.

With inflation continuing to surge, and no signs of a slowdown on the horizon, it is paramount that investment returns keep pace with levels of inflation. An investment portfolio that does not factor in inflation means clients’ inheritance funds are essentially being eaten away and may result in clients struggling to fund their rising care costs in later life.

And while the Bank of England has begun to adjust its interest rates to tackle this, the base rate remains at 1.25% today – far too low to offer any protection against the levels of inflation we’re seeing today. Many investment opportunities are, therefore, struggling to keep pace with what’s happening in the wider economy.

This is why a solar strategy could provide one route towards mitigating the high levels of inflation that we see today. And as we head towards a winter impacted by the ongoing conflict in Ukraine and growing energy costs, we believe that there is a lot of value in backing UK-focused solar assets.

We are operating in uncertain and unusual economic circumstances, but there are opportunities out there.

Now is the time for financial advisers to look at their clients’ portfolios to check if there is an opportunity to hedge against inflation by investing in UK solar.

Andrew Webster is a director at Beringea