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Research reveals an increase in worried consumers - could smoothing be the solution?

18/07/2022

George Pullar

 

The results of the latest LV= Wealth and Wellbeing Monitor highlight how the finances of millions of people are feeling the squeeze of the cost of living crisis.

 

Our indices are all now the worst we’ve seen since we started the Wealth and Wellbeing Monitor two years ago. Many consumers have seen sharp increases in their monthly living costs and are having to take measures such as cutting non-essential spending, dipping into savings, or even taking on debt.

Another effect of the current rise in inflation is the erosion of the purchasing power of cash savings. Consumers might consider moving some of their savings from cash to investments, however, our research shows that many savers are reluctant to do this due to worries about market volatility.

Inflation worries increase further

It will be no surprise to many that the proportion of UK adults worried about rising prices has increased once again. Now half (49%) of UK adults say they are worried, up from 33% last quarter.

21% of UK adults are also worried about their savings being devalued by low interest rates and increasing inflation. This is a particular concern to the mass affluent* (going from 25% to 34%). This is also a concern for 26% of retirees.

We also found that 1 in 4 is unaware that inflation could reduce the value of their savings (if inflation is greater than the interest rate on their savings). Younger people are less likely to understand the impact of inflation on savings. Some 34% of 18-34 year olds stated they don’t, compared to just 14% of over-65s.

63% are too worried about volatility to consider moving their savings

Inflation is currently eroding the purchasing power of cash savings. However, we found that a significant proportion of consumers are reluctant to put their money into stock-market investments.

graph showing the majority are not considering moving their savings to a higher risk investment

Only 31% of UK adults have moved (or are currently considering moving) some of their savings to a higher risk investment in order to achieve more growth, while 63% of consumers say they are too worried about volatility to consider moving their savings.

A smoothed solution?

As an industry, we need to ensure consumers have access to low volatility products that potentially give returns higher than cash savings, but also offer the peace of mind that many consumers clearly need.

For savers who are worried about volatility, one solution could be smoothed funds. These are designed to reduce the volatility felt by consumers, but still produce real returns over the long term.

LV= has recently launched two new smoothed funds, Extra Cautious and Impact Growth. The Extra Cautious fund may be well suited to a client who is looking to combat the impact of inflation on their cash savings without introducing much more volatility.

The Impact Growth fund is a medium risk fund designed with ESG credentials. Benefitting from the same smoothing mechanism as our existing funds (which boast over 15 years of stable performance) this fund invests in sustainable equities, providing a potential solution for your clients who, whilst they accept they may have to move further up the risk scale to achieve their required capital or income needs, would feel much more comfortable in that journey were they supported by a smoothed multi-asset solution.

To find out more, visit lvadviser.com/smoothed-investments

In exceptional market conditions (when the underlying price is 80% or less of the averaged or ‘smoothed’ price) the fund will typically be valued on the underlying price. Or, using our discretion, may be valued on the daily gradual averaged price with a shorter smoothing duration. We reserve the right to move to the underlying or gradual averaged prices at other times.

*Mass affluent is defined by LV= as consumers with £100,000 to £500,000 assets excluding property.

Source: LV= Wealth and Wellbeing Monitor, May 2022 edition