52 days to financial ruin
The average Brit would run out of money in just 52 days if they were to lose their job, according to new research.
The Yorkshire Building Society says most people have monthly outgoings of £1,445, but only have access to £2,474 in savings – giving them just over £1,000 to live on if their income stream disappeared. To make matters worse, as much as 36% of the population would run out of money in just 11 days if they found themselves out of work, struggling to cope on only £500 worth of savings.
Younger people are particularly vulnerable, with those aged between 35 and 44 having money that would last for just 39 days if they were unable to work, while 16 to 24 year olds could survive financially for just 41 days. The Yorkshire says that nine out of 10 people have no form of income protection insurance to cover their bills if they were unable to work or lost their job.
The worrying findings come as leading economists warn that the UK is sailing dangerously close to a recession. With inflation currently at the 3.8% mark – nearly 2% over the government’s target - some experts predict the Bank of England may be forced to raise interest rates, putting even more pressure on cash-strapped Brits struggling to cope with the increasing cost of living.
Tanya Jackson, corporate affairs manager at the Yorkshire Building Society, says: "In the current economic climate, our research paints an extremely alarming picture for those consumers without any protection products in place.”
Among those who do have some form of insurance cover, the majority have policies that will only pay out if they die rather than lose their jobs; 47% have life insurance, while just 10% have income protection cover.
Protecting yourself in a downturn
* Whether you are struggling to cope with your finances or not, keeping a budget and monitoring your outgoings in a good way to ensure you don’t overspend, and can also help you cut back and save more instead.
* If your monthly budget shows you have some disposable income, then consider taking out some sort of protection policy. Matt Morris, a spokesperson for protection IFA Lifesearch, says: “An income protection plan can be a real lifesaver if you suffered an accident or illness. You can even add redundancy cover on top of this for a small premium, so for around £30 a month you could receive around £1,000 of cover a month.”
However, Morris warns that if you had prior knowledge of redundancy before you claim, your insurance would be invalid. “The insurance company will always check up on you if you were to be made redundant, so be honest else you could find yourself blacklisted.”
* Maximise income by finding out if you are entitled to any benefits, such as tax credits or disability living allowance. You may be able to raise money by other means too, such as renting a room, or by increasing the rent of non-dependants living with you.
* National debt advice charity The Money Advice Trust (MAT), recommends that once you have maximised your income you should tackle your most pressing debts first – the ones that carry the harshest penalties for default. Missing your mortgage repayments, for example, could lead to your home being repossessed.
* If you are facing financial difficulty then don’t bury their head in the sand. If your budget sheet shows you are unable to afford your monthly mortgage payments, the MAT advises contacting your lender to try and negotiate a short payment holiday, switch to interest-only mortgage for a short period or extend the term of the mortgage to reduce the monthly repayments.
If all else fails, the MAT urges you to seek advice. “The good news is that there is free confidential, independent money advice available if people do get into difficulty,” says Joanna Elson, chief executive of MAT. The National Debtline, Citizens Advice, advice UK or the Consumer Credit Counseling Service all offer free independent debt advice for information on the full range of options available to you.
A loan in which the borrower pays only the interest on the sum borrowed for the life of the mortgage but, at the end of the mortgage term, they still owe what they originally borrowed as this remains unchanged. The advantage of an interest-only mortgage is the monthly repayment is considerably lower than for a comparable repayment mortgage. Lenders generally insist the borrower also invests in an endowment, ISA or pension savings policy that, on maturity, is intended to pay off the capital loan.
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).
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
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.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.