Survive the recession
The UK is now in recession, with the economy shrinking by 1.5% in the last three months of 2008, following a 0.6% contraction in the previous quarter. A recession is defined of two consecutive quarters (or six months) of negative growth.
Bearish forecasting group Capital Economics says the bigger than expected 1.5% contraction was the sharpest quarterly contraction since 1980. It was also significantly larger than any quarterly fall seen in the 1990s recession, according to the Centre for Economic Business Research (cebr).
Charles Davis, economist at the cebr, says the size of the contraction is more of a concern than the fact the UK is in a recession. He warns that the UK economy is set for the steepest contraction in the post war era in 2009, with a fall in the region of 3% year-on-year.
How long it lasts – and how bad it will get – remains to be seen.
A report by leading economic forecasting group, Ernst & Young ITEM Club, published in October, forecast a “short and shallow” recession, with the economy shrinking by 1% next year and then growing by just 1% in 2010.
However, Andrew Smith, chief economist at KPMG, paints an ominous picture for the year ahead: “Retail sales were extremely weak in December, unemployment is accelerating sharply and, with no sign that the housing market is anywhere near stabilising, it is difficult to see why things should improve in the foreseeable future.”
Hann-Ju Ho, s senior economist at Lloyds TSB, agrees. “We are certainly in the eye of the storm at the moment and all leading indicators suggest that there will be a further contraction in the first three months of this year. As such the UK’s economy will post a negative growth for most of 2009.”
Whether the recession lasts for a year or longer, the key to surviving it is to face up to your financial issues now and get them under control. Even if you don’t have any debt and feel financially secure, taking a long look at your finances and budgeting for hard times is still recommended.
If you are struggling with debt then facing up to your problems is the first step to recovery.
Take some time out to review your situation, making a comprehensive list of all your financial commitments. You can find out exactly how much you owe by getting a copy of your credit record from one of the credit reference agencies, such as Experian, Equifax or Callcredit.
Now make a budget – you can read our guide to writing a budget or watch the Moneywise TV step-by-step guide.
Once you have worked out where you are able to cut back, and how much you could save, you need to be sure you can afford to meet your debts. Some debts should be prioritised over others – for example, if you fail to meet your mortgage or secured loan payments then you could end up losing your home. Council tax, gas and electricity bills should also be prioritised.
If you are still unable to fully meet your debts, then you need to face up to the fact that you need help. Speaking to others will help; discuss the situation with your family, but if that doesn’t lead to a solution then contacting a debt charity is a good idea. Advice groups include the Consumer Credit Counselling Service or the National Debtline.
Useful Moneywise articles:
Ditch the debt and quit borrowing for good
Work off your debts
The downturn in the housing market coupled with the mortgage squeeze means many homeowners have been hit with big spikes in their repayments. With the rising costs of living also biting people’s budgets, the fear is that the number of people unable to meet their mortgage repayments will increase, leading to a jump in repossessions.
The number of homeowners facing repossession jumped by more than 90% over the past 12 months, according to official statistics from the Financial Services Authority (FSA). Its figures show that in the third quarter of 2008 the number of new house possessions increased by 92% compared to the same period the previous year, with 13,161 new cases.
The good news is the government has introduced a host of measures designed to protect homeowners from aggressive repossession policies. Lenders will have to explore a variety of other options before they can repossess your home, including increasing the mortgage term or putting you on interest-only repayments.
But these measures don’t offer you 100% protection from repossession – it is still vital to meet your repayments.
If you are struggling, then contact your lender immediately and explain your problem. The sooner you get in touch, the sooner it may be able to help you and, at the very least, it shows you are responsible and want to honour your debt.
You can also contact the housing charity Shelter for independent advice.
One of people’s biggest concerns about a downturn in the economy are the job losses that go with. Unemployment is also on the up, and will only continue to rise going forward.
While there isn’t a lot you can do to avoid losing your job, it is worth knowing what your rights are when it comes to redundancy - this effectively means that your job disappears because of your employer's need to reduce its workforce. Redundancy may happen because a workplace is closing down, or because fewer employees are needed.
If you have worked for the same employer for at least two years continuously then you should be entitled to a redundancy package. You may also be entitled to other - non-statutory - payments if this has been agreed in your contract of employment.
The amount of money you receive will depend on how long you have been employed in the company, your age and your current salary.
The Department for Business Enterprise and Regulator Reform offers these calculations for redundancy packages:
* 0.5 week’s pay for each full year of service where age during year less than 22
* 1.0 week’s pay for each full year of service where age during year is 22 or above, but less than 41
* 1.5 weeks’ pay for each full year of service where age during year is 41+
At this time of economic uncertainty, experts say income protection is increasingly relevant. New research from Global Reviews, the customer experience benchmarking company, has found that while many people have life insurance, far fewer are protected if they are made redundant.
With household budgets already being stretched, you should think about what you would do if you were to lose your job, or become ill or injured and unable to work for a while. Unfortunately, the majority of consumers do not have more than a few months worth of salary tucked away so if they were unable to work for a longer period of time they would find themselves in serious financial trouble.
While it is impossible to predict whether you'll find yourself in this kind of situation there are a number of protection insurance policies you could take out to safeguard yourself from financial disaster should anything
happen to you or any of your loved ones.
1. Life insurance
Life insurance is the most basic cover you can take out and it would pay out in event of death so should you pass away your loved ones will be provided for. A traditional life insurance policy last for the duration of your life but if money is tight you could opt for a term assurance policy instead that would last for example the term of your mortgages, say 25 years.
2. Critical illness insurance
Critical illness insurance pays out a tax-free lump sum if you are diagnosed with a critical illness covered by your insurer. It also pay out on death. All critical illness policies cover cancer, heart attack and stroke, which
are the serious illnesses people are most likely to suffer from. It is important, however, to know that insurance providers have a number of exclusions and that conditions such as back pain or mental health problems would not be covered as they are not seen as "critical".
3. Income protection
This type of insurance policy would pay you an income should you be unable to work due to illness or injury and it usually pays out either until you get back to work or you retire. It would usually pay up to 70% of your
income. While quite costly, this could be a lifesaver for someone who is unable to work due to a long-term illness. As part of an income protection policy you could also add redundancy cover, something which has become more popular recently.
4. Accident sickness and unemployment cover and payment protection insurance
Similarly to income protection insurance these policies would provide you a monthly income should you become unable to work due to illness, injury and, in some cases, redundancy. While many banks have been pushing these products in the past, you should be aware that they might not be that great. While sometimes they could be seen as cheaper they would only pay you an income for up to two years and there are many exclusions attached to them.
For example many policies would not pay out should you be off work due to back pain or stress-related issues despite these being the two most common type of claims filed.
One of the features of the current economic downturn is the impact on banks. We’ve seen two banks become nationalised in the UK so far – Northern Rock and Bradford & Bingley – and the whole sector is contracting with big players such as HBOS merging with Lloyds TSB while Alliance & Leicester has been bought by Abbey’s Spanish owner Santander.
Meanwhile, a number of savings banks with Icelandic parents have been shut down by the British government, and for the first time ever the Financial Services Compensation Scheme (FSCS) has been tested in relation to people’s deposits.
Understandably, many people are still concerned about how safe their money is. Offshore savers, in particular, are up in arms because the Channel Islands of Jersey and Guernsey do not offer any deposit protection to non-residents.
The FSCS covers UK banks up to £50,000 per customer per bank, However, one issue confusing the matter is the way banks are covered by the FSCS – so, people with more than £50,000 in different accounts but in the same bank or two banks that are part of the same group may not be covered.
Read our guide to how the banks are covered by the FSCS
A homeowner’s worst nightmare; repossession is an action of last resort by mortgage lenders to recover money from borrowers that have failed to keep up with repayments on their mortgage or other loan secured on their home (see secured loan). Repossession is a legal procedure that has to go through several processes before the homeowner is evicted and the property reposed. These are: if a borrower keeps defaulting; the lender applies for a solicitor’s notice; the lender instigates possession proceedings through the court; at the court hearing a possession order is granted and sometimes a possession warrant; a bailiff is appointed and an eviction notice issued at which point the homeowner has two to three weeks to vacate the property.
As the name suggests, secured loans require security, or “collateral”, usually in the form of property, a motor vehicle, or another valuable item, as a guarantee for the loan. This effectively reduces the level of risk to which a lender is exposed, as the lender has a claim against your home, or other effects, if you default. Secured loans are often available at competitive interest rates. Types of secured loans include mortgages, logbook loans and some types of hire purchase where the loan is secured on the goods you’re buying and these are repossessed if you default.
Term assurance provides cover for a fixed term with the sum assured payable only on death. Term assurance premiums are based primarily on the age and health of the life assured, the sum assured and the policy term. The older the life assured or the longer the policy term, the higher the premium will generally be. There are generally two types of term assurance. Level term assurance premiums are fixed for the duration of the insurance term and a payment will only be made if a death occurs during the insurance period and with decreasing term assurance, life cover decreases during the insurance term reducing the cash payout the longer the term runs and this is reflected in the premium.
The practice of locating your financial affairs (banking, savings, investments) in a country other than the one you’re a citizen of, usually a low-tax jurisdiction. The appeal of offshore is it offers the potential for tax efficiency, the convenience of easy international access and a safe haven for your money. However, offshore is governed by complex, ever-changing rules (such as 2005’s European Union Savings Directive) and, as such, is the exclusive province of the wealthy and high-net-worth individuals.
Tax-free lump sum
An inelegant phrase that is nonetheless accurate in what it describes: a one-off payment to a beneficiary that is free of any form of taxation. Usually received when using a pension fund to purchase an annuity, as 25% of the overall fund can be taken as a tax-free lump sum.
Income protection insurance
If you can’t work in the event of sickness or illness, income protection insurance aims to give you an income, with the amount of income set by you up to 75% of your gross (before tax) income with the premiums varying by how much of your salary you want to cover, as well as your age and health and when you want to start receive any payouts. Any payouts from income protection insurance are tax-free and usually continue until you recover, reach your selected pension age or the period of cover specified in the policy comes to an end. Income protection insurance does not cover redundancy but you can buy it as a bolt-on.
Critical illness insurance
This cover pays out a tax-free lump sum if you become seriously ill. All policies should cover seven core conditions: cancer, coronary artery bypass, heart attack, kidney failure, major organ transplant, multiple sclerosis and stroke. You must normally survive at least one month after becoming critically ill, before the policy will pay out. Payouts are determined by premiums and premiums are determined by the severity of your illness, the less severe the lower the premiums.
The Financial Services Compensation Scheme is the compensation fund of last resort for customers of authorised financial services firms. If a firm becomes insolvent or ceases trading, the FSCS may be able to pay compensation to its customers. Limits apply to how much compensation the FSCS is able to pay, and those limits vary between different types of financial products. However, to qualify for compensation, the firm you were dealing with must be authorised by the Financial Services Authority (FSA).
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.
Generally thought of as being interchangeable with insurance but isn’t. Assurance is cover for events that WILL happen but at an unspecified point in the future (such as retirement and death) and insurance covers events that MAY happen (such as fire, theft and accidents). Therefore you buy life assurance (you will die, but don’t know when) and car insurance (you may have an accident). Assurance policies are for a fixed term, with a fixed payout, and unlike life insurance have an investment aspect: as a life assurance policy increases in value, the bonuses attached to it build up. If you die during the fixed term, the policy pays out the sum assured. However, if you survive to the end of the policy, you then get the annual bonuses plus a terminal bonus.
Generally thought of as being interchangeable with life assurance, but isn’t. Life insurance insures you for a specific period of time, at a premium fixed by your age, health and the amount the life is insured for. If you die while the policy is in force, the insurance company pays the claim. However, if you survive to the end of the term or cease paying the premiums, the policy is finished and has no remaining value whatsoever as it only has any value if you have a claim. For this reason, life insurance is much cheaper than life assurance (also called whole of life).