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Options and Opportunities
Defences against deflation
When inflation raged in the eighties and early nineties, people bought houses to protect themselves against the fast-rising cost of living and declining value of money. But what do we do now when the credit crunch is producing an environment of deflation? Bricks and mortar certainly won’t help, unless of course the housing market surprises everybody and does a U-turn.
Until or if that happens, deflation is threatening to reduce pensioners’ income, as holders of retail price index -linked annuities and other RPI-dependent assets know all too well. We have seen the biggest decline in the RPI in 60 years while the consumer price index is also on the way down.
All this makes for cheaper living costs, which is good, but the other side of the coin – lower income – is hurting portfolios that haven’t been deflation-proofed. Some life companies have already warned clients to brace themselves for shrinking pay-outs.
But it’s not all gloom. Apart from going back to work, assuming paying jobs are available, there are options to combat the threat of deflation. Pacific IFA’s advisers are happy to talk clients through these but one option is annuities with in-built protection in the form of a ‘floor’ that guarantees income won’t fall with deflation. Another is long-dated government bonds that deliver a fixed income. And if it’s thought deflation will be a brief episode, short-dated gilts could be the answer.
Obviously, the big question is how low the RPI will go before the pendulum swings and inflation returns. The experts are divided on the issue, to put it mildly, but some predict it could be two years away. At that point inflation-linked investments will look good again.
The main point is that, far from being helpless in these turbulent times, there are effective strategies at our disposal to cover most situations.
Disclaimer: Please note the views and opinions of the financial journalist Selwyn Parker do
not necessarily reflect those of Pacific IFA Limited.