Is there really any point in saving anymore?
Last year ended on a rather bleak note as Chancellor George Osborne revealed that Britain will be in a mess for longer than originally anticipated.
The Chancellor's Autumn Statement delivered gloomy news as he confirmed that growth for 2012 had had to be revised down to -0.1%, from 0.8% predicted in the Budget back in April 2012. Osborne also revealed that it will take longer than originally expected to clear the country's debts, meaning further spending cuts.
So the squeeze will continue for some time to come. But while many of us understand that belt-tightening is a must to get us through this period of financial instability, reading through the Autumn Statement it's clear that savers - yet again - will be among the major losers.
ISA and pension changes
Osborne declared that the annual ISA allowance will increase to £11,520 in April this year, up from £11,280, but that's only an increase of just over 2%. The pleas from media and pension commentators to allow savers the option of putting the whole allowance, and not just half, into a cash ISA were also ignored.
For pension savers, the Chancellor announced that from 2014, the lifetime pension allowance will be lowered from £1.5 million to £1.25 million and the annual allowance from £50,000 to £40,000.
While the government estimates that only 340,000 people will have pension funds in excess of the new lifetime limit when it comes to effect, the annual limit is likely to hit many small business owners who don't pay into a pension at all because they are cash poor, but instead prefer to make a large lump sum payment when they sell their company.
Even relatively middle-ranking public sector workers such as headteachers and senior nurses may be caught out by the reduction in the annual allowance because of the nature of their final salary pension schemes.
Some may argue that those affected by this are all higher earners who can afford to take a bit of a hit, but I believe that is missing the point; these are people who are choosing to save their money for the long term, rather than spend it.
They are doing exactly what the government has been imploring us all to do for years - make provision for our own futures rather than rely on state handouts. Doing so is crucial not just for individuals but also for the British economy, which cannot sustain the current state pension system.
Yes, tinkering with pension tax relief may seem like an easy way to implement some of the spending cuts needed, but the government should be careful not to change pension policies too often unless it wants fewer people to save. Pensions aren't sexy; people don't take one out for pure pleasure, and the only way we will get more people to save into one is by making them trustworthy savings vehicles.
If the government continues to dip into people's savings pots to get the economy back on track it will send out a completely different message. And the same goes for savings accounts - people need to be given more incentive to save, whether in the form of better interest rates or more tax breaks.
As Dr Ros Altmann, director-general of Saga, says: "More needs to be done to help savers - from young people saving for their first property to those reaching retirement and trying to make the most of their savings. If we continue to punish those who have saved for their future, we will teach younger generations that it is not worth saving at all."
Dissuading people from saving will not just undermine growth but also leave future generations unable to fund a house deposit, or worse, survive financially in old age. It's a ticking time bomb - and the government should be doing all it can to avoid it blowing up.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
Final salary pension
A defined benefit pension scheme is one where the payout is based on contributions made and the length of service of the employee. A typical scheme would offer to pay one-60th (0.0168%) of final salary (the one you’re earning when you finally retire) for each year of contributions to the scheme (even though these years were probably paid at a lower salary). Someone retiring on a final salary of £30,000 who had been a member of the scheme for 25 years would receive a pension of 42% of their final salary (£12,300 a year before tax). Sadly, many companies are winding up their final salary schemes or closing them altogether, meaning pension benefits accrued after a certain date (or those available to new employees) may be on a less generous money purchase basis.
This is more usually a feature of car insurance but it can also crop up in contents, mobile phone and pet insurance policies. An excess is the amount of money you have to pay before the insurance company starts paying out. The excess makes up the first part of a claim, so if your excess is £100 and your claim is for £500, you would pay the first £100 and the insurer the remaining £400. Many online insures let you set your own excess, but the lower the excess, the more expensive the premium will be.
A type of derivative often lumped together with options, but slightly different. The original derivative was a future used by farmers to set the price of their produce in advance before they sowed the seeds so that after the harvest, crops would be sold at the pre-agreed price no matter what the movements of the market. So a future is a contract to buy or sell a fixed quantity of a particular commodity, currency or security (share, bond) for delivery at a fixed date in the future for a fixed price. At the end of a futures contract, the holder is obliged to pay or receive the difference between the price set in the contract and the market price on the expiry date, which can generate massive profits or vast losses.