If you’ve worked hard over the past few years, you might find yourself benefiting from a decent salary that covers your monthly outgoings and allows you to save for the future.
However, current high inflation in the UK could be diminishing the “real” value of your pay, as salaries rise at a slower pace than the surging cost of living.
According to the Office for National Statistics (ONS), inflation reached 9.9% in the year to August 2022 and, according to the Guardian, the Bank of England (BoE) expects it to continue to rise in 2023.
Financial difficulties facing UK households have been well documented in the news over the past few months. And, with a recession looming, these issues could be intensified before the end of the year.
So, proactively reviewing your investments, savings, and pension contributions could go a long way towards protecting your wealth, as the eroding effect of inflation decreases the real value of your wages.
Read on to discover what your real pay is, why it may be affected by the current circumstances, and what you can do to reduce the effect inflation is having.
Your real pay is your salary adjusted for inflation
The value of your salary can be deceptive, as the purchasing power of your money is affected by inflation. A rise in pay might seem beneficial at first glance but, unless it keeps up with the rate of inflation, you might actually be worse off.
According to the ONS, regular pay (that is, salary excluding bonuses) rose 4.7% between April to June 2022. However, when adjusted for inflation, the real value of pay has actually fallen by a record 3%.
Essentially, this means that your money has less spending power than it did, even though your pay may have increased in numerical value.
As your wages struggle to keep up with inflation and the cost of living crisis tightens your budget, it is important to consider ways you can protect your finances.
3 ways to help your real pay stay ahead of inflation
1. Invest your money, rather than saving it
Investing your wages in the stock market, rather than choosing to keep them in savings, is typically the riskier option. Even so, the potential for greater returns might make stocks the better option for ensuring your cash keeps up with the eroding effects of rising inflation.
Stock markets around the world have endured a difficult year to date. But, while short-term market fluctuations can be expected, stocks tend to produce positive returns over the long term.
IG examined the performance of the FTSE 100, an index of the 100 largest companies in the UK, and found that, for any 10-year period between 1984 and 2019, there were median annual returns of 8.43% with dividends reinvested.
Working with a financial planner can help you build a well-diversified portfolio, aligned with your tolerance for risk, that helps you protect your wages from the effects of high inflation.
You can find out even more about why investing your money is likely to provide a better result than saving it in our latest blog all about this subject.
2. Increase your pension contributions
If you intend to use a pension as a source of income during retirement, it may be beneficial to not only maintain your contributions during periods of high inflation, but to consider increasing them if you have surplus cash available.
Your pension will be invested in a variety of assets by your provider, or you may choose your own investments if you have a scheme such as a self-invested personal pension (SIPP).
That means you may be able to generate returns on your retirement savings just as with your invested money. And, because your pension is typically held over a long period, you can benefit more from compound returns – essentially growth on growth.
There is also the added benefit of associated tax relief. Your pension contributions benefit from relief up to the Annual Allowance, which currently stands at £40,000 for the 2022/23 tax year.
Tax relief is automatically paid at the 20% basic Income Tax rate. This effectively means for every £500 you contribute to your pension, you are only paying in £400, with the additional £100 being contributed by the government.
If you fall under the higher- or additional-rate tax brackets, you can claim further relief through your self-assessment tax return.
In combination, the tax relief and potential investment returns available from a pension can help to keep your real pay ahead of inflation.
3. Work with a financial expert
A myriad of potential benefits stem from working alongside a financial planner. A plan built around a long-term strategy can help you stay on track to meet your personal and financial goals.
A financial planner can help you bridge the gap between wage growth, or lack thereof, and high inflation through assessing your savings, debt obligations, and making sure you have a well-diversified investment portfolio.
Crucially, a good financial planner understands the individual – your needs, your goals, and your worries.
They will tailor options that both suit your personal aims and your tolerance to risk, to help produce the necessary growth needed to make up any shortfalls and reach a point where you can live the lifestyle that you desire.
Ultimately, one of the most unsung benefits of working with a financial planner can be the reassurance it gives.
Managing your finances and your long-term goals can be incredibly stressful. A financial planner takes the burden of this stress off your shoulders and works towards fostering a trustworthy relationship that can give you peace of mind when it comes to your personal finances.
Speak to us
High inflation can create a whole range of cost of living issues, but as scary as it sounds, a well-designed plan can help you overcome them.
If you’d like to work with an experienced financial planner who can help you manage your money and make the most of your real pay in these tricky circumstances, please get in touch with us at Cordiner Wealth.
Email hello@cordinerwealth.co.uk or call 0113 262 1242 today to find out more.
Please note
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.