The cost-of-living crisis that followed the pandemic was one of the most significant economic events in recent memory. UK inflation peaked above 11% in late 2022, and while it has since come down considerably, its effects are still being felt.
Although the initial drivers of inflation – supply shortages, energy prices and labour market tightness – have largely eased, new pressures have emerged, including geopolitical uncertainty and the knock-on effects of the conflict in the Middle East.
Inflation has fallen to around 2.6% as of mid-2026, though it remains above the Bank of England’s 2% target and could rise again later in the year. Although the rate of increase has slowed, prices have not come back down. UK consumer prices are over 8% higher than they were three years ago, and those who spend a higher proportion of their income on essentials have been the most affected.
In this guide, we explain how rising costs can affect your financial plan and what you can do about it.
Cashflow Planning
It’s a good idea to have a cashflow plan when considering your goals and your finances. Whether you use a simple spreadsheet, a free online tool, or sophisticated financial planning software, it’s worth having some idea of where you want to be and how to get there.
Your cashflow plan should include:
- Income, adjusted over time
- Expenditure over the course of your life
- Any one-off inflows or outflows
- A projection of how much capital you are likely to build up and draw down
You will need to make a number of assumptions for your cashflow plan, including how much you are likely to earn and spend, and the level of investment growth you are likely to achieve.
You will also need to estimate the rising cost of living. While your expenditure might not increase every year, it’s still a good idea to build this in as it gives you more flexibility. You will also need to estimate the cost of any future expenditure, which could be more than you think.
Ideally, if inflation is rising, your income will as well, but you should be conservative in your assumptions.
You should carefully consider the rate of inflation to use in your cashflow plan. If you underestimate inflation, you could end up spending more than you intended.
Inflation has averaged higher than the Bank of England’s 2% target over the past decade, reflecting the exceptional inflation experienced during 2022 and 2023. This is a reminder that inflation can be highly unpredictable. You may want to assume a rate of 3% to 4% in your planning, with the flexibility to adjust if conditions change.
Remember, it is your basic expenditure that is likely to increase the most. If you have a budget for luxuries or discretionary spending, you can probably make more modest assumptions, as even if you underestimate inflation, it will be easier to make lifestyle adjustments later on.
Budgeting and Cash
There is no getting around the fact that household budgets have been significantly stretched over the last few years. Although the rate of price rises has slowed, the cumulative impact remains, and many people are also paying more tax due to frozen income tax thresholds.
It’s worth reviewing your budget now to see if any savings can be made. Cancel any unused subscriptions and make sure you are receiving the best value on any services you keep.
While the labour market has softened – with unemployment rising and fewer vacancies available – it is still worth exploring ways to increase your income, whether through upskilling, a career move, or a part-time side income.
You should aim to keep around 6 months’ worth of expenditure in cash in case you need to deal with any emergencies. The good news is that with interest rates currently at 3.75%, you should be able to earn a reasonable return on your cash savings, though it is worth shopping around for the best deals.
Debt Reduction
With interest rates still well above the historic lows of recent years, the cost of borrowing remains elevated.
It’s also a good idea to make a plan to consider paying off short-term debt, as this can save you money and make you more financially resilient.
Avoid using credit cards where possible, unless you can repay the balance every month. Existing balances may be able to be moved to 0% or low-interest deals.
You may also want to consider overpaying your mortgage or switching to a better deal. With the interest rate outlook uncertain, it is worth reviewing whether your current deal is still competitive. Fixing could provide certainty, while those on a variable rate should factor in the possibility of further changes.
Investment Planning
Changes in inflation and interest rates can affect the stock market as investors move their money between different types of investment. While certain patterns tend to occur (for example, shifts between growth and value stocks during periods of rising or falling rates), it’s not always possible to predict investor behaviour or when such events will occur.
Historically, remaining invested in a diversified portfolio has given investors a better chance of outperforming inflation over the long term.
Pension Contributions
As costs increase, it might be tempting to reduce or stop your pension contributions. There are several good reasons why you shouldn’t do this:
- Pensions are extremely tax-efficient. For many basic-rate taxpayers, every £80 personal contribution becomes £100 after basic-rate tax relief.
- Public sector / Final Salary / Defined Benefits schemes are very generous and offer valuable guarantees.
- If you are in a workplace scheme, your employer will most likely match your contributions up to a point.
- If you stop your contributions, other priorities will take over, and you might forget to restart them.
- The longer your contributions are invested, the more you will benefit. Smaller, early contributions are more effective than trying to build a decent retirement pot later in life.
In fact, if you can afford it, now might be a good time to increase your contributions as this will help to support your lifestyle in retirement. It is also worth noting that from April 2027, unused pension funds will be included in your estate for Inheritance Tax purposes, making pension planning more important than ever.
Gifting
Even if rising prices do not squeeze your own finances, you might want to offer some support to family members. Making gifts during your lifetime can be extremely tax-efficient, and means you can help with house deposits, weddings, or childcare costs.
You can gift up to £3,000 per year, which is immediately outside your estate for Inheritance Tax purposes. Regular gifts from employment, pension or dividend income are also exempt. Larger capital gifts drop out of your estate over seven years.
By making gifts, you can support your family through difficult times while reducing the tax on your estate. With recent changes to Business Property Relief and Agricultural Property Relief, and the upcoming inclusion of pensions in estates from April 2027, reviewing your gifting strategy is particularly important.
Remember, the economy is cyclical. The recent period of high inflation has demonstrated how quickly conditions can change, but it won’t last forever, and a degree of balance has already started to return. A financial plan can help you to make good decisions regardless of economic factors.
Please don’t hesitate to contact a member of the team to find out more about financial planning.
The content in this article was correct on 04/09/2026.
The value of your investment can go down as well as up and you may get back less than the amount invested
A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age).
The Financial Conduct Authority does not regulate Cashflow Modelling Trusts, Tax and Estate Planning
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