Inflation is rising quickly, and with it the cost of living for everyone. But canny wealth management can be the best safeguard against the rising tide of costs.

Inflation – or the pace at which the price of goods and services rises – is at its highest level since March 2021. The current rate of inflation, as of 15 September, is at 3%, based on the Office for National Statistics (ONS) CPIH which includes housing costs and is considered the most accurate measure.

Areas such as petrol costs, energy bills prices, food shops and all manner of other expenses are soaring in price as the country adapts to demand after the worst of the pandemic. But day-to-day personal finance pressures of rising bills aside, one of the most pernicious impacts of high inflation is the erosion it causes to wealth.

Inflation is the very reason why good wealth management matters. The current top-rated easy access cash ISA offers a rate of just 0.6%, according to Savers Friend.

Inflation is still expected to increase this year, but relatively speaking the average rate on inflation over the last 30 years has been 2.9%.

Using this calculator from Candid Money, we can see the impact inflation has on savings. At a rate of 3%, £100,000 of savings today will only have the purchasing power equivalent to £54,379 in 20 years’ time. That is an extraordinary erosion of wealth.

Were this pot of cash to sit in the best-buy cash ISA mentioned above, it would grow to £112,746 and have today’s equivalent purchasing power of just £62,425.

Instead, if you were to invest that £100,000 with an average return of 5%*, after inflation averaging 3% over 20 years, you’d be left with a pot worth £271,264 – which would have the equivalent purchasing power today of £150,192. And this is without added future contributions.

The importance of tax

The other greatest factor that will have an impact on the value of your wealth, ultimately, is tax. While it is unknown what the government will do with its latest measures, we have a taster of what is to come in the form of the National Insurance hike.

There’s no guarantee on what measures will be changed, but it is likely as the government looks to pay down coronavirus debt it will at the very least attempt to close some loopholes and end some tax perks.

The issue here is it is extremely difficult to keep ahead of these kinds of tax changes. While it’s a reasonable bet that ISAs will be protected, other tax wrappers such as pensions are under constant scrutiny for what is called ‘salami slicing’ or the whittling down of allowances and closing of other benefits.

Combined with the harsh realities of inflation, smart wealth management, undertaken in conjunction with a qualified financial adviser, is a no-brainer that will save your hard-earned nest egg from crumbling.

*Investment returns are never guaranteed, this is taken as a representative example.