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Full podcast episode transcript
[0:08] Susannah Streeter: Hello and welcome to Switch Your Money from Hargreaves Lansdown, with me, Susannah Streeter – Head of Money and Markets.
[0:14] Sarah Coles: And me, Sarah Coles – Head of Personal Finance.
[0:16] Susannah Streeter: We have been enjoying the beautiful weather – it has turned a little bit dull, though, in the last couple of days. It’s quite hard to forecast what’s going to be ahead in terms of the summer, isn’t it? As we know, whenever there’s a really lovely spring and early summer, it looks like it’s gonna be rain in August, but you can never tell – a bit like the economy – we just don’t quite know what’s going to happen!
[0:39] Sarah Coles: Yes – and, in fact, it’s not just us who are having to take an umbrella and a sunhat out whenever we go. I think the forecasters – looking ahead – particularly, when you look at the Bank of England and how they were looking ahead to inflation... they’re finding it just as tricky as we are.
[0:51] Susannah Streeter: Yeah – interesting that the Monetary Policy Committee – those policy makers – really were split at the last meeting, when it comes to what is going to happen in inflation – and then that attitude towards interest rates.
We’ll go into that in a bit more detail, but that’s why we’re gonna be focusing on what we think might happen when it comes to inflation over the coming months – both in the UK and in the US – and what that could mean for our investments and, ultimately, our money.
[1:20] Sarah Coles: Yes – so we’re gonna be speaking to Victoria Hasler – Head of Fund Research at HL – to explain specifically what this means for bonds. And Helen Morrissey’s here – our Head of Retirement Analysis.
Hi, Helen.
[1:29] Helen Morrissey: Hello – thank you for having me on again – always a pleasure.
[1:31] Sarah Coles: What are you gonna be talking to us about this time?
[1:33] Helen Morrissey: We’re gonna be talking about inflation and how it affects retirees – because you could be retired for a very long time, so it’s something that you really do have to factor in.
[1:43] Sarah Coles: It’s great that we get to talk about pensions more, Helen – I was worried there that you weren’t gonna get the chance! [Laughs]
[1:46] Helen Morrissey: There’s always the chance to talk pensions – absolutely.
[1:50] Susannah Streeter: So, let’s also think about where we stand on trade negotiations – because, of course, that does also have an impact on where inflation might be expected to end up.
Now, we had a bit of a surprise – the UK really did jump the queue when it comes to those trade negotiations and that deal with the US. It’s also done a deal with India – and it’s in the throes of doing a deal with the European Union as well.
This is the first wide-reaching deal – or agreement – ever since Brexit was a done deal.
[2:26] Sarah Coles: I don’t want to sound like I’m obsessed with inflation, but this has also had a big impact on inflation, hasn’t it?
So, the question is whether... if we do get these tariffs to stay, is that gonna mean higher inflation, or is it gonna mean lower inflation – so can you talk us through the options?
[2:39] Susannah Streeter: Yeah – so let’s take the deal with the United States, for example.
If there hadn’t been a deal struck – or if we hadn’t had this 90-day pause between the US and China – this could have had implications for the UK in terms of creating a more deflationary environment – so inflation actually falling, rather than rising. And there’s a number of reasons for that.
Obviously, there were real concerns that growth here in the UK really could take a hit – and then that could lead to a lower inflation environment because, if there’s lower growth, there’s a lot more caution around – companies aren’t investing so much – they’re not spending so much – it doesn’t have that impact on prices in the economy so much. But also, if the US was effectively closed to Chinese manufacturers, there was an expectation that they would start pushing more of their goods – their cheaper goods into other markets like the UK – also, potentially, pushing down prices.
However, because we’ve had this 90-day pause – although we don’t quite know what’s gonna happen at the end of it – but also, because we’ve had this trade deal between the UK and US – which means that growth might not be affected quite so badly as was first thought – it means that, potentially, we could see inflation rise. So, those deflationary forces won’t be at work so much – and, instead, the focus has switched back to pesky wage growth – because, of course, wage growth – including bonuses – up at last count was around 5%. And that is still worrying for policymakers on the Monetary Policy Committee at the Bank of England.
[4:15] Sarah Coles: So, there’s gonna be lots of uncertainty – lots to keep your eye on in terms of inflation. It’s putting your finger in the air and seeing which way the wind’s blowing on any given day – might help us know!
[4:22] Susannah Streeter: This is the problem – because we’ve got this pause at the moment – and it’s the same in the United States... In fact, consumer sentiment really has been dented, but that’s partly because the latest reading was carried out in April – midway through all the tariff turmoil – and inflation expectations have risen pretty sharply in the United States – but that was at the height of the crisis.
It could be improving a little – I’ll have to see what the reading for May comes in like – but, nevertheless, inflation is also – in the United States – expected to creep up a bit as well – which is now why financial markets are not predicting quite so many interest rate cuts this year as they did before.
[5:03] Sarah Coles: So, inflation... it feeds into loads of different things. So, obviously, it feeds into spending, and saving, and investing – and everything else – so I wanted to just go back and spend a little bit about what actually inflation is. Because I think, a lot of the time, we can just get cracking talking about inflation without really going into the nuts and bolts.
So, super speedily, the way we measure inflation is that we have the Office for National Statistics – they send out their researchers and they find out the prices of what’s known as ‘A basket of goods.’ So, this basket is supposed to include everything we spend our money on – things like milk, and bread, and eggs – but it also aims to do the full gamut of everything we spend.
[5:37] Susannah Streeter: Like yoga mats – and things like that?
[5:38] Sarah Coles: And fishing rods, and caravans, and boats. It’s just crazy the number of things that are in that basket.
It then weights them – on the grounds that not that many people buy yoga mats and fishing rods very often – and so then it comes up with a figure of how much those prices have risen over the last year. So, that’s what inflation sets out to measure.
Now, there are few things going on that it’s also worth knowing. So, one of the things that the Office for National Statistics does is it breaks people up into lots of different income brackets – and whether they’re retired and whether they’re not retired – and they measure the inflation rate for each of those individual groups.
So, when you look at how all the different groups – how all their inflation is measured – what you tend to find is that it will depend on the prices thar are rising. So, for example, if you go back to the cost-of-living crisis... we had huge rises in the cost of essentials – and, as a result, those people who spent really big portions of their spending on the essentials – so that tend to be people on low incomes – tends to be retirees... they actually struggled with much higher personal rates of inflation than generally...
[6:31] Susannah Streeter: Yeah.
[6:31] Sarah Coles: ...in the rest of the country. So, when you look at the inflation rate, you’re not necessarily knowing exactly what’s happening to your spending – that will depend on what you spend your money on. It’s more just supposed to give you a general idea of the direction of travel.
[6:41] Susannah Streeter: Because, of course, policymakers... they do have to hang their hats on data – they’ve gotta choose which data – so they need to have this benchmark, don’t they? Completely understandable.
[6:51] Sarah Coles: I think also, when you’re looking at how inflation affects you, personally, one of the things people look at is whether their savings are keeping pace with inflation. So, they might think, ‘Oh, well, inflation’s really high at the moment – my savings rate isn’t all that high – I’m, therefore, not keeping pace – so is it something that I need to worry about?’
So, it’s worth going back a little bit to that savings rate. So, when you’re looking at what you’re going to get... if it’s a fixed rate or a if it’s a variable rate, you’re really looking at the interest rate on those savings in the future.
When you’re measuring inflation, you’re measuring how prices have risen in the past. So, it’s really important not to get bogged down into, ‘I’ve absolutely got to beat this figure with that figure’ – because you’re measuring two totally different things. Really, the aim is to try and make as much as possible by shopping around on your savings in the right kind of account for you. And, of course, if you’re holding that money for 5 to 10 years – or longer – then it stands a better chance of keeping pace with inflation if you’re investing.
It’s just worth bearing in mind, you don’t need to absolutely be across all the figures – you just need to know the general direction of travel – and make sure that your savings and investments are working as hard as possible for you.
[7:50] Susannah Streeter: And, of course, inflation doesn’t just affect equities – it can have an impact on bonds as well. So, we thought we’d take a bit of a dive into bonds – the role in their portfolio – but also the impact on inflation – also known as ‘Fixed Income,’ of course.
And, to do that, Victoria Hasler has snuck into the studio – she is Head of Fund Research here at Hargreaves Lansdown. Hello, Victoria – thanks for coming in.
So, let’s first start talking about, ‘What is a bond?’ It’s worth giving that little explainer, isn’t it?
[8:23] Victoria Hasler: Absolutely – hi, Susannah.
A lot of our clients will know this already, of course – but, for those who aren’t quite sure – maybe want just a bit of a refresher... Bonds are really simple – they’re essentially IOUs. So, I take £100 – I lend it to a company or government – and they promise to pay it back to me at some date in the future – so, 10 years’ time.
In the meantime, they pay me some interest on that – so let’s say they pay me 5% interest – so £5 a year, just to make the sums easy – and that’s my compensation for lending them the money.
[8:57] Susannah Streeter: Now, of course, supply and demand will affect bond prices, but there’s this role of inflation as well. Can you explain it? And also, how interest rates have an impact.
[9:07] Victoria Hasler: Yeah – absolutely. So, let’s start with the interest rates.
Now, the example I used before – where I said I got paid the 5% interest... that might sounds quite good – 5% interest – but, actually, if I can get 6% interest on a current account, then suddenly that 5% doesn’t sound so great, after all – and the price of the bond would have to fall to make me want to buy it.
If, on the other hand, I can only get 4% on a current account, then that bond is looking a lot more attractive – and maybe I’d be willing to pay a bit more for it.
[9:36] Susannah Streeter: Let’s dig into why inflation can have this impact on bonds. Can you give me an example?
[9:42] Victoria Hasler: So, inflation will have an impact in two ways on your bond – so, first of all, the capital repayment, and then also that interest payment – or coupon – that you get paid.
So, let’s start with the capital. I lend a company £100 – they’re gonna give it back to me in 10 years’ time. That’s great – except that, in 10 years’ time, £100 is not worth the same to me as it is today. That’s complicated – so, rather than pounds, let’s think about ice-creams. It’s nice one day – I might want an ice-cream – you might want an ice-cream.
If I take my £100 today, that might buy me 50 ice-creams – which is lovely! In 10 years’ time, however, it’s quite unlikely that £100 is going to buy me 50 ice-creams because, probably, the price of ice-creams will have...
[10:22] Susannah Streeter: Absolutely – ...
[10:23] Victoria Hasler: ...gone up by then.
[10:24] Susannah Streeter: ...yeah.
[10:24] Victoria Hasler: So, that £100 is worth less to me in 10 years’ time than it is today because of inflation. The same is true for the coupon - £5 today is worth more than £5 in a year – or five years or 10 years. So, to counter that, you need the price of the bond to move with inflation.
Slight problem here – that you might have picked up on already – is that I don’t know what inflation is gonna be in 10 years’ time – or five years’ time – or really at any point over the life of that bond – so we have to estimate it. And bonds tend to trade off what we call ‘Inflation expectations’ – that just means what people expect inflation to be in the future.
Generally speaking, if people expect inflation to be high, they think their £100 will be worth less in the future – and they will need the price of the bond to be less today to want to buy it. If they think inflation’s gonna be really low, then the price of the bond can be a bit higher.
[11:23] Susannah Streeter: And that’s why we see this volatility in the bond market, don’t we? When we just don’t know – certainly, with all the trade turmoil there’s been – what impact there is going to be on inflation!
[11:33] Victoria Hasler: Absolutely right – and that’s something that’s really important to note. And it’s not so much about current inflation – it’s about what people expect inflation to be in the future. So, if people aren’t really sure what inflation’s gonna be, then you would expect the price of bonds to be a bit more volatile – and move around that bit more.
[11:49] Susannah Streeter: And, of course, people always want to know, ‘When’s the best time to buy something?’
[11:52] Victoria Hasler: [Laughs]
[11:53] Susannah Streeter: If I wanted to buy a bond today, what should I be aware of?
[11:57] Victoria Hasler: Okay. So, to answer that question, we really have to think about those two elements – so the capital and the coupon payment – or interest – that you’re getting.
Now, looking at two things at once is quite hard – so, as bond investors, what we try to do is roll that all into one number – which we call the ‘Yield of the bond.’ Now, that’s a very simple number – and all it does is it takes your expected return over the life of the bond. So, the capital repayment at the end – and all of those interest payments that you’re gonna get – and it gives you an annualised figure for what that’s worth.
If the yield of the bond is higher than what you expect inflation to be over the next, say, 10 years – then that probably looks like quite good value and you should buy the bond. If that yield is lower than what you expect inflation to be, then that doesn’t look like such good value – and you’d want the price of the bond to fall a bit before you would want to buy it.
[12:48] Susannah Streeter: So, obviously, there are these fluctuations – but bonds, ultimately, are seen as, usually, a stable part of a portfolio, aren’t they?
[12:58] Victoria Hasler: Yes – absolutely. And the reason for that is that they act as what we call a ‘Diversifier’ – which just means that they tend to move in the opposite direction to equities – not all of the time – and, particularly not over short time periods – but, over the long-term, they can provide a little bit of ballast – and when we see equity markets fall a lot, often bonds don’t fall anywhere near as much – or may even go up a little bit.
[13:23] Susannah Streeter: Obviously, there have been volatile times – there will be volatile times at some point again in the future – and, of course, we can never completely judge which investments are going to go up and down at any one time! But that’s a really useful guide to what people should look out for if they are looking at the bond market.
Great to have Victoria there, talking through the medium of ice-creams rather than cake – as we’re used to, Sarah. And, interestingly as well... of course, we have to remember that – in terms of bonds – bond prices really also can be affected by the credit worthiness – perceived credit worthiness – of bonds.
So, for example, recently, we’ve just had Moody’s downgrading the United States from a triple-A rating – and then that saw the price of 30-year bonds actually fall back – because of the perceived extra risk that perhaps investing in those bonds could bring.
[14:21] Sarah Coles: We can see that inflation matters hugely when you’re building your wealth, but it also matters when you get to the stage of actually spending your wealth – so when you’ve saved for retirement.
So, this – as ever – a brilliant time to bring in Helen Morrissey. So, Helen, can you tell me a bit about how inflation affects pensioners?
[14:34] Helen Morrissey: Yeah – it’s really important to think about retirement. You could be retired for 20 years – or even more – and, over that time, inflation is gonna have an impact on your purchasing power.
Now, I know that we’ve had some sky-high inflation in recent years – and it doesn’t have to be that sky-high to really nibble away at your purchasing power over time – and what seems like a decent level of retirement income earlier on in your retirement... if you don’t take account of inflation over a time period, it could start to whittle away on that – and make you struggle to meet your budget over time – so it’s really important.
And so, if we break it down a bit. We’ve got the State Pension, first and foremost – which is the absolute foundation of people’s retirement income. Now, the good news about that State Pension is that it is operated every year in line with the triple lock – and the triple lock, it [s.l. operates/uprates 15:33] a State Pension by whichever is the highest of 2.5% wages or inflation. So, that’s really important – you’ve got that chuck of money there that is going up every single year – and that’s hugely important for safeguarding your purchasing power.
But, in terms of what you do with your pensions – when it comes to retirement – you’ve got a few different options there – and inflation has to be a factor in your decision-making.
So, if you’re going down the guaranteed-income route, then you’re no doubt looking at annuities. You can get what are known as Level Annuities – where the annual income that you get, at the outset, doesn’t change. So, even if you’re retired for 20 years, you will still get that same level of income. You can also get inflation-linked products that will increase the income either by a set percentage – 3%, for instance – or you can have RPI-linked annuities.
So, the only issue is that starting incomes for inflation-linked annuities do tend to be a good bit lower than a Level Annuity – and this can cause problems – ‘cause, often, when people are looking to purchase that guaranteed annuity, they just think, ‘Well, what’s the best deal? Oh, the Level Annuity has the highest income – therefore, I’ll go for that.’ And, initially, that might seem fine – but, over time, that could get whittled away by inflation.
[17:01] Sarah Coles: I suppose, psychologically, it’s quite hard to go, ‘Oh, yes, I think I’ll go for that lower income level right now.’ It’s quite difficult to make yourself do that.
[17:07] Helen Morrissey: It is difficult – ‘cause, if you see something that could be a couple of thousand pounds more, then that’s psychologically quite difficult – ‘cause you’ve got to think, ‘How long am I likely to live?’ – ‘Am I gonna get my money back?’ There’s all those factors, but it is really important to think about that – because, once you buy an annuity, you’ve bought it – you can’t really unwind it. So, it’s really important to think about those issues of longevity and inflation over time.
It’s also worth saying that annuity quotes are guaranteed for a limited time only – and rates do change regularly – so you do need to keep on top of what’s going on in the annuity market. They may go up or down in the future.
Now, for those people that aren’t looking to get an annuity, there are other options there. Remaining in income drawdown, for instance – which allows you to keep all of your pension pot – or a part of it invested. And this means that you’ve got the potential to see that pension pot continue to grow throughout your retirement – and, obviously, you’ve got that flexibility of how much you take and when – but the whole idea being that, in theory, if you remain invested, it will grow over time – and it should help you to at least meet inflation.
Now, this is a higher-risk option – as your money does remain invested – and it will go up and down in value – and you could get back less than you invest – but it is an option there... that, if you want to remain invested, there is that potential to outstrip inflation there as well. The thing is, with income drawdown... we’ve gotta be really careful about not taking out too much – particularly in the early stages of your retirement.
[18:43] Sarah Coles: One of the other issues you then have is that you’re trying not to take too much – and there’s a risk then that people might err on the side of caution – and take too little – and then maybe struggling with their lifestyle. I guess it’s a decision you make – partly around certainty of income as well as just keeping pace with inflation.
[19:00] Helen Morrissey: Yeah, absolutely – you’ve got to build a plan. Just as you often say – in the more day-to-day stuff – of working people making a budget – ‘Stick to it’... the same rings true for retirement – ‘What do I need?’ – ‘What am I likely to need?’ – ‘What have I got?’ – ‘How can I make it last?’ And, if in doubt, financial advice – an advisor – can really help you to work through that, if need be.
With regards to income drawdown – one approach that we put forward is the so-called ‘Natural yield approach’ – and that is where you only take the percentage of income as generated by your investments. So, that means it can go up and down – as your investments go up and down – but what we say is to keep a cash reserve of around one to three years’ worth in an easy-access cash account – that you can dip into as and when you need – to supplement that income.
But, as you say, just remember that retirement is a long-term game – you’ve got that pot of money – and inflation’s a key factor that you need to build into your plan – and to make sure that it lasts.
[19:58] Sarah Coles: One of the things we should mention – when we talk about pensions – is that there are a number of things around pensions. You can’t, obviously, be able to access that earlier in life, can you?
[20:05] Helen Morrissey: No – so that’s a really important point, Sarah.
Money in a pension is not usually accessible until the age of 55 – and this is rising to age 57 in 2028 – so that’s a really important one. And also, I did mentioned, there, financial advice – and I know that not everybody’s gonna want to get financial advice – or can afford financial advice. So, it’s really important to say that the Government does offer a free, impartial guidance service – which is called Pension Wise – and that can really help you to understand your retirement options – so you can look that up as well.
[20:37] Sarah Coles: Brilliant. There’s loads of food for... as ever, Helen – thank you.
My tenuous link now – from food thought to my fact of the week – which has...
[20:45] Helen Morrissey: [Laughs]
[20:45] Sarah Coles: ...some food in it – which is great!
So, this time, I looked in at the inflation basket – and I am slightly obsessed with inflation baskets. So, I’m gonna give you a list of 10 things:
Can you tell me which of the following isn’t in the basket? So, I’m gonna start with food – which is a Chicken Kiev – that classic of the 1980’s table.
We’ve got showerheads – nanny fees – the cost of calling Directory Enquiries. Caravans – boats – I’ve given you some clues for those. Squash racquets – hamsters – a dating agent’s fees – or a diamond ring?
[21:15] Susannah Streeter: So, is it just one?
[21:16] Sarah Coles: Just one.
[21:17] Susannah Streeter: I think it’s the cost of calling Directory Enquiries. It could be a trick question – ‘cause I know you do quite like doing those, Sarah.
[21:23] Sarah Coles: [Laughs]
[21:24] Susannah Streeter: Otherwise, I would say it’s Chicken Kiev. I just don’t think... although you do see it still a lot on the shelves, but it’s a little bit retro, isn’t it?
[21:32] Sarah Coles: It is a retro kind of vibe – it’s almost like having Black Forest Gateau.
[21:35] Susannah Streeter: Yeah – but there is, on the shelves, quite a lot – so I do think it’s the cost of calling Directory Enquiries.
[21:39] Sarah Coles: And what about you, Helen – what d’you think?
[21:41] Helen Morrissey: I must admit, at first glance, the cost of calling Directory Enquiries was the one that jumped out at me. I’m pretty sure Chicken Kiev is...
[21:50] Susannah Streeter: Yeah.
[21:51] Helen Morrissey: ...one of the items on the list. D’you know what... I’m gonna throw caution to the wind – and I’m gonna say, ‘Hamsters.’
[21:56] Sarah Coles: I’m afraid to say that I am totally predictable. You were absolutely 100% right – not that it’s Directory Enquires, but it is a trick question.
[22:03] Susannah Streeter: Oh!
[22:03] Sarah Coles: So, actually, they are all still on the list – ...
[22:05] Susannah Streeter: Are they?!
[22:06] Sarah Coles: ...and I particularly love the fact...
[22:07] Susannah Streeter: Ah!
[22:07] Sarah Coles: ...that you’ve got squash racquets and Chicken Kiev. It just feels like somebody’s come back from the ‘80s – and put a list of...
[22:12] Susannah Streeter: Yes!
[22:12] Sarah Coles: ...all the things they buy on there.
[22:13] Susannah Streeter: [Laughs]
[22:13] Helen Morrissey: But that’s amazing.
[22:14] Susannah Streeter: I knew hamsters were definitely there!
[22:16] Helen Morrissey: [Laughs]
[22:18] Susannah Streeter: And, on that note, I think we should go – but, before we do, we should say that this was recorded on 16th and 19th May 2025 – and all information was correct at the time of recording.
[22:27] Sarah Coles: Nothing in this podcast is personal advice – you should seek advice if you’re not sure what’s right for you. And, like cash, investments and any income they produce can rise and fall in value, so you could get back less than you invest – and past performance is not a guide to the future. Tax rules can change and benefits depend on individual circumstances.
[22:42] Susannah Streeter: This is not advice or a recommendation to buy, sell, or hold any investment. No view is given on the present or future value or price of any investment – and investors should form their own view on any proposed investment.
[22:51] Sarah Coles: And this hasn’t been prepared in accordance with legal requirements designed to promote the independence of investment research – and is considered a marketing communication.
[22:58] Susannah Streeter: Non-independent research is not subject to FCA rules prohibiting dealing ahead of research. However, HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing.
[23:11] Sarah Coles: You can see our full, non-independent research disclosure on our website for more information.
So, all that’s left is for us to thank our guests: Helen, in the studio, Victoria – who was in the studio – [laughs] – and our Producer, Elizabeth Hotson!
[23:22] Susannah Streeter: Thank you very much for listening – we’ll be back again soon. Goodbye!
[23:26] Sarah Coles: Goodbye!
[23:26] Helen Morrissey: Goodbye!