The June inflation figure came as a surprise to many. The annual rise in the retail prices index jumped to 4.6%, while the government's chosen inflation target, consumer price inflation, hit 3.8% against a target of 2%. The next few months are likely to see higher figures, if only because a year ago prices were virtually unchanged between June and September 2007.

If you are a higher rate taxpayer, 4.6% inflation means that you have to earn 7.67% gross interest from bank deposits just for your cash to retain its purchasing power. If you are a basic rate taxpayer, the corresponding interest goal is 5.75%.

An Inflation Checklist

•  When looking at investment returns, allow for inflation as well as tax.

•  Think about building inflation protection into your pension to avoid a steadily falling standard of living in retirement. But be warned, an inflation proofed pension annuity can cost over 60% more than its non-increasing counterpart.

•  Check that your life and health insurance cover has kept pace with inflation. For example, if you had life cover of £100,000 five years ago, it needs to be £119,581 today to maintain purchasing power.

Should you be increasing your regular savings? To match £100 a month saved in January 2000, you would need to be putting aside about £130 a month now.

ACTION
If your financial plans have not been reviewed for a few years, inflation may have left them in need of repair. They should certainly be reviewed.

Talk to us about updating your financial planning for 2008 and beyond.

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This news item is provided strictly for general consideration only and is based on our understanding of law and HM Revenue & Customs practice as at July 2008. No action must be taken or refrained from based on its contents alone. Accordingly no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case.

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