There has probably never been a more financially difficult time.
Since the credit crunch of 2007 most people’s finances have suffered in some way, and now the Eurozone crisis has reared it’s head again, but just how does it affect your finances and what can you do about it?
Despite Bank Base Rate being at 0.5% and likely to stay there for months and perhaps years to come, for some people with mortgages the cost of borrowing is actually expected to increase, as banks and building societies find their wholesale funding costs rise.
Furthermore as mortgage lenders try and control the amount of money they lend, borrowing criteria seems to become tighter each week, making it harder for many people to get a mortgage.
Both of these issues are likely to have a knock on effect on the already depressed housing market.
So what can you do?
Well, the cost of fixed rate mortgages has risen for the past seven months in a row; if you think this type of deal is right for you it probably makes sense to fix your rate sooner rather than later. Also, if you have a mortgage where you pay your lender’s Standard Variable Rate (SVR) you are open to the sorts of increases we have seen in recent months, you therefore might want to consider alternatives.
However, those people with a Tracker mortgage, linked to Bank of England base rate, continue to enjoy low rates and are likely to do so for some time to come.
If you are planning on moving house or buying a new property you need to make sure you are in as strong a position as possible when it comes to your new mortgage application. This means maximising your deposit, and doing everything you can to improve your credit score, whilst making sure all payments to existing credit commitments continue to be made on time.
People retiring soon
If you are nearing retirement the recent events in the Eurozone are very bad news and will affect you in two main ways.
Firstly, if your pension is still invested in stocks and shares it is likely the value of your fund will have been affected by stockmarket volatility, meaning you could have a smaller fund to convert into an income.
Secondly, the low gilt yields, which are a result of gilts becoming more popular with investors who see the UK as a safe haven, are pushing Annuity rates even lower and reducing the maximum income available from Capped Drawdown (Income Drawdown) plans.
Last week the yield on 10 year UK gilts fell to 1.87%, the lowest level since 1703. We are already starting to see the effect with Aviva, Prudential and Canada Life all reducing their Annuity rates.
Worse is to come with the fall in gilt yields compounded by the implementation of an EU directive which will see Annuity rates between men and women equalised from December 22nd 2012; for men this is likely to result in a reduction in Annuity rates
What can you do?
As unpalatable it may seem you could choose to defer your retirement and continue to work, however this may not be desirable, or even possible.
Assuming you do want to retire buying an Annuity will crystallise any loss you have made and tie you into today’s Annuity rates for the rest of your life. Despite this an Annuity may still be the right option for you, especially if you are looking for a simple solution, which will give you a guaranteed income for life.
However, other options are available.
For example using Income Drawdown would allow you to take an income, and a tax free lump sum if required, whilst your fund remains invested in the hope that stockmarkets will rise again and allow you to make good any losses. Of course this is by no means guaranteed and there are also other disadvantages with Income Drawdown to be considered.
If you want to avoid tying yourself in to today’s low Annuity rates you could also consider using a Fixed Term Annuity. Whilst this would involve crystallising your current pension fund, it would give you the opportunity to take a temporary Annuity, which could be reviewed in the future. Fixed Term Annuities tend to be used by people who hope Annuity rates will rise in the future or that they will qualify for an Enhanced Annuity in years to come, again this is not guaranteed and Annuity rates could decrease still further.
Never has it been more important to review all your options before deciding on how you will convert your pension into an income, the wrong choice now, could prove to be a very expensive mistake.
If the Eurozone crisis continues to affect the UK economy as many people, including the Bank of England, predict it will, it is likely that interest rates will stay low for many months and perhaps years to come.
Whilst this might be good news for mortgage holders, although even they are starting to see lenders push rates up, it is certainly not good news for savers, who are struggling to cope with relatively high inflation and all time low interest rates.
It seems that the Bank of England’s Monetary Policy Committee are opting to keep interest rates low in an effort to help the wider economy and are prepared to accept that inflation will remain above their 2% target.
To get a ‘real return’, that’s to say above inflation, a basic rate tax payer currently needs to tie up their savings four or five year fixed rate bonds. Many savers are reluctant to commit their savings for such a long period and are therefore having to put up with losing money in real terms.
There are limited options for savers, clearly shopping around for the best buy savings interest rates has never been more important and any tax fee savings vehicles such as Cash ISAs (Individual Savings Accounts) should also be fully utilised.
Savers could also consider becoming investors and taking some additional risk with their capital, in the hope that other asset classes, for example stocks and shares, might produce a better return than Cash. This is of course far from guaranteed.
Investors in stocks and shares have had a rough ride in recent weeks with many of the world’s stockmarkets seeing significant losses due to the Eurozone crisis.
Whilst we would encourage you to review your investments on a regular basis, now is a time to remember the fundamental rules of investing and to avoid knee jerk reactions. Cashing your investments in just after a fall in value rarely makes sense, despite how tempting it might be.
If you are investing for the long term, then don’t let the current crisis deflect you from the course you have set yourself. If however you were planning to use the capital you have invested in the short term consider whether there are ways you can defer this need or use alternative assets, so you don’t have to cash in your investments so close to a fall in value.
Whether you are a saver, an investor, a borrower or a would be retiree it is likely that you will be affected in some way by the current escalation of the Eurozone crisis. Furthermore if the Bank of England are correct, you will feel the effects for some significant time to come.
There are things you can do and now is the time for careful planning to reduce the effects the crisis will have on your personal finances.
Our team of Independent Financial Advisers in Nottingham are experienced in dealing with the issues highlighted in this article. If would like advice on your savings, investments or retirement plans call one of our IFAs today on 0115 933 8433, alternatively enquire online or email firstname.lastname@example.org