Inflation is causing concern in across the EU and in the UK. It has been climbing steadily since last summer, hitting over 8% in the Euro area in June and July and expected to climb to 13% in the UK. Even low levels impact your spending power over time, so take steps now to protect your savings and retirement income for your long-term future.

Inflation has been a major news story this year, but we don’t need to read news reports to know the cost of living is going up, we’re only too aware with our weekly shops and electricity bills.

This follows 10 years of benign, easy to ignore inflation, but in fact we were not immune from it then. It is always there, slowly eroding the spending power of the Euro in our pocket and we should always be vigilant about how it impacts our financial security through retirement.

Although this inflation surge is lasting considerably longer than first anticipated, and is likely to get worse before it gets better, it is not still not expected to be long-term. But hopefully people will view it as an eye opener and take this long-term threat more seriously now. We cannot predict what inflation will be in ten or twenty-years’ time, but we do know that even low levels can seriously reduce your spending power over time if your money does not grow at the same rate.

The Eurozone

The Harmonised Index of Consumer Prices (HICP) was 2.2% in July 2021. This July it hit 8.9%, another record for the single currency.

French consumer prices, as measured by the local Consumer Price Index (CPI) reached 6.1% in July, up from June’s 5.8%. The acceleration of service prices linked to the summer period has contributed to the increase, as have food prices. Energy prices, however, slowed.

The UK
In the UK, the Consumer Price Index reached 10.1% in July, up from 9.4% the previous month. The July figure was the highest annual CPI inflation rate in the National Statistic series, which began in January 1997. Rising food prices made the largest upward contribution.

Will inflation remain high?

When prices began rising last summer, that was largely caused by the ‘base effect’ (inflation the previous year had been unusually low in the pandemic) and supply difficulties as economies exited from lockdowns. However, the crisis in Ukraine then exacerbated the issues, particularly with energy prices escalating though uncertainty about supply chains has also pushed prices up.

In July, the European Commission revised its Eurozone 2022 inflation forecast upwards, from 6.1% for the year to 7.6% – peaking at 8.4% in the third quarter. It will then ease to 4% for 2023 as a whole, falling below 3% in the last three months of the year.

Its Summer Economic Forecast explains:

“Russia's invasion of Ukraine has put additional upward pressures on energy and food commodity prices. These are feeding global inflationary pressures, eroding the purchasing power of households and triggering a faster monetary policy response than previously assumed.”

In the UK, the Bank of England has issued bleaker forecasts. On 4 August it warned that it now predicts inflation to hit 13% in the last quarter of the year, and that it will “remain at very elevated levels throughout much of 2023, before falling to the 2% target two years ahead”.

In response to inflation, the Bank of England has raised its interest rate six consecutive times since December 2021. At its latest Monetary Policy Meeting on 3 August, the committee voted 8-1 to increase the bank rate by 0.5 percentage points, to 1.75%. This is the highest since December 2008 – but still a long way below inflation.

Inflation and your savings and retirement income

No-one is immune from inflation. We all need to plan to protect our savings and future income from the rising cost of living. Making sure your money lasts as long as we do should be an integral part of our financial planning for retirement.

If you’re retiring now at age 60, you need to plan for over 30 years of retirement. Unless your savings grow each year, they will buy you considerably less as the years go by.

As a basic illustration, if you have €50,000 in a current account with no growth, and inflation is 3% every year, after 10 years its value will have fallen to around €37,000. After 20 years it’s around €27,500 and after 30 just €20,555. That’s a 59% reduction in purchasing power.

You therefore need to invest in assets that can be expected to produce enough growth to at least keep up with inflation. As we know from the last decade, bank interest rates cannot be expected to do this – in fact, many savers have been earning negative real rates of return.

While you may become more averse to investment risk in retirement, remember that inflation is also a big risk to your savings. You can reduce investment risk to comfortable levels by obtaining an objective calculation of your attitude to risk, then building a suitable well-diversified portfolio around your risk tolerance, time horizon, circumstances and objectives.

Holding your investment portfolio within an arrangement that is tax efficient in your country of residence helps protect your capital from unnecessary taxation as well as inflation. Review your financial planning annually to have peace of mind about your future, then get back to enjoying your retirement years.

HICP/CPI inflation data is at 25 August 2022.
By Rob Kay, Senior Partner, Blevins Franks

Blevins Franks Group is represented in France by the following companies: Blevins Franks Wealth Management Limited (BFWML) and Blevins Franks France SASU (BFF). BFWML is authorised and regulated by the Malta Financial Services Authority, registered number C 92917. Authorised to conduct investment services under the Investment Services Act and authorised to carry out insurance intermediary activities under the Insurance Distribution Act. Where advice is provided outside of Malta via the Insurance Distribution Directive or the Markets in Financial Instruments Directive II, the applicable regulatory system differs in some respects from that of Malta. BFWML also provides taxation advice; its tax advisers are fully qualified tax specialists. Blevins Franks France SASU (BFF), is registered with ORIAS, registered number 07 027 475, and authorised as ‘Conseil en Investissements Financiers’ and ‘Courtiers d’Assurance’ Category B (register can be consulted on www.orias.fr). Member of ANACOFI-CIF. BFF’s registered office: 1 rue Pablo Neruda, 33140 Villenave d’Ornon – RCS BX 498 800 465 APE 6622Z. Garantie Financière et Assurance de Responsabilité Civile Professionnelle conformes aux articles L 541-3 du Code Monétaire et Financier and L512-6 and 512-7 du Code des Assurances (assureur MMA). Blevins Franks Trustees Limited is authorised and regulated by the Malta Financial Services Authority for the administration of retirement schemes. This promotion has been approved and issued by BFWML.

You can find other financial advisory articles by visiting our website here

In August, France approved changes to succession law which will affect the forced heirship rules applied on French assets. It will allow children to contest a will, even if you opted for UK law to apply to your estate. This could affect the succession planning you set up over recent years.

France’s long-standing Napoleonic code was created to protect the bloodline. Children are protected heirs and must inherit 50-75% of an estate (depending on the number of children). These rules apply to your worldwide estate if you die as a habitual resident of France, and a will, even a foreign one, will be ignored if it attempts to override these reserved heirship rights.

Brussels IV
In 2015 there a welcome development for British expatriates who wish to avoid French succession laws. The European succession regulations (‘Brussels IV’) allow foreign nationals to elect for the law of their country of nationality to apply to their assets on their death, rather than that of their country of residence. Provided this election is made in their will, nationals of many common law countries (such as the UK and US) can avoid forced heirship rules and potentially choose to leave children out of a will.

France’s new succession rules for French assets
On 13 August 2021, the French Constitutional Council approved new legislation which will affect the forced heirship rules applied on French assets.

Under the new legislation, if French assets pass according to the provisions of a country which does not impose forced heirship rules – as is the case in England and Wales – the protected heirs (biological and adopted children) can make a claim for the share they would be entitled to under the French rules.

This means children could challenge the parent’s will and seek for compensation. This would even apply to estranged children who have had no contact with the parent for decades. The compensation mechanism, however, only applies to French assets.

In summary, the new rules apply where:

· the deceased individual was either habitually resident in an EU country or a national of an EU country; or

· the children were habitually resident in an EU country or nationals of an EU country; and

· the law applied in the will of the deceased individual does not include any forced heirship / protected share for his/her children.

The new legislation is likely to come into force before the end of 2021 (three months after the publication of the law) and only succession after the relevant date will be affected.

At first glance, this new legislation seems contrary to the European succession regulations which override the domestic French legislation. Therefore, there is a strong chance it will be challenged in the European Courts.

There are also outstanding questions on how the rules would apply. For example, when an election is made to apply the law of Scotland which has forced heirship rules but enables parents to disown children in some circumstances.

Does this impact you?
Many British expatriates have used Brussel’s IV to avoid France’s forced heirship rules.  Now, under the new rules, if you die as a French resident and have elected, for example, to use English law, if you do not leave your biological children a share of your estate equal to what they would be entitled to under French rules, they can potentially make a claim for their protected share of your French assets.

If you wish to retain flexibility of disposition of assets at death, it is now more important to minimise the value of the assets held in France.  If the new rules are applied on a strict basis (ignoring the European regulations), it will be more difficult to pass your French assets according to your wishes.

This should be considered very carefully when drafting wills in France. French may now not be willing to include the election to use the law of a country with no forced heirship rules.

The interaction with the Brussels IV rules is not yet clear, and it is likely to take some time to establish how the new rules are applied in practice.

Estate planning for France
Even before this development, we always recommend you should take specialist advice before using Brussels IV as electing for UK law may have consequences you are not aware of.  You also need to watch out for high succession tax rates (up to 60%) if you leave assets to distant or non-relatives.

In any case, there are steps you can take to avoid some of these problems created by France’s succession regime. If you have not yet bought French property, take personal advice before you do as matters may be sorted by simply reviewing how the property should be held. And even what some people think of as obvious answers, such as putting property in their children’s name to avoid taxes on death can have unexpected effects, including actually increasing the tax liability.

Estate planning in France is complex, with the succession law and tax regimes very different to the UK’s. But professional advice and advance planning will make things easier and give you peace of mind, and help ensure the right money goes to the right hands at the right time.

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.

Blevins Franks Group is represented in France by the following companies: Blevins Franks Wealth Management Limited (BFWML) and Blevins Franks France SASU (BFF). BFWML is authorised and regulated by the Malta Financial Services Authority, registered number C 92917. Authorised to conduct investment services under the Investment Services Act and authorised to carry out insurance intermediary activities under the Insurance Distribution Act. Where advice is provided outside of Malta via the Insurance Distribution Directive or the Markets in Financial Instruments Directive II, the applicable regulatory system differs in some respects from that of Malta. BFWML also provides taxation advice; its tax advisers are fully qualified tax specialists. Blevins Franks France SASU (BFF), is registered with ORIAS, registered number 07 027 475, and authorised as ‘Conseil en Investissements Financiers’ and ‘Courtiers d’Assurance’ Category B (register can be consulted on www.orias.fr). Member of ANACOFI-CIF. BFF’s registered office: 1 rue Pablo Neruda, 33140 Villenave d’Ornon – RCS BX 498 800 465 APE 6622Z.  Garantie Financière et Assurance de Responsabilité Civile Professionnelle conformes aux articles L 541-3 du Code Monétaire et Financier and L512-6 and 512-7 du Code des Assurances (assureur MMA). Blevins Franks Trustees Limited is authorised and regulated by the Malta Financial Services Authority for the administration of retirement schemes. This promotion has been approved and issued by BFWML.

You can find other financial advisory articles by visiting our website here