It’s no secret that the UK economy is in dire straits. After years of strong growth, the credit crunch in the US triggered economic meltdown around the globe, pushing stockmarkets into freefall, sending businesses to the wall and putting more and more people out of work.
The figures for the UK economy don’t make for pleasant reading. The FTSE All-Share has plummeted from its 2008 peak in May, and despite a rally this year, was still down by 33% at the end of June. We’ve also seen major names, such as Woolworths and MFI, disappear from our high streets – victims of the recession. And in the job market, the latest figures show that 2.44 million people were unemployed in the UK at the end of June.
But, while these are certainly worrying times, there are a number of ways you can turn the current doom and gloom to your advantage. In this article, Moneywise brings you some useful financial planning strategies to help you survive the recession and boost your finances.
YOUR OWN ECONOMY
Whatever the state of the global economy, the way you handle your personal economy is likely to have a much more significant effect on your financial wellbeing.
“Look at your spending habits,” says Bob Perkins, technical manager at Origen Financial Services. “There could be ways to make savings that will free up some spare cash.”
The best way to get an objective view of your financial affairs is to draw up a budget showing your income and outgoings. There are plenty of online tools to help with this, including Moneywise’s own budget planner.
Armed with the figures, it’s possible to identify areas where you can make reductions. For example, you could cut back on luxuries such as dining out, beauty treatments or takeaway coffees, or downgrade some of your spending by shopping in a cheaper supermarket or buying more ‘own label’ foods.
Once you’ve freed up some extra cash, consider tackling any debts.
“Get rid of your debts. Without the interest on these, you’ll really notice a difference to your finances,” says Ray Boulger, senior technical manager at mortgage broker, John Charcol. “Pay back your most expensive debt first. Although it might be difficult to increase repayments on an unsecured loan, there’s nothing to stop you paying off your credit card as quickly as you can.”
Read Moneywise's guides on dealing with debt
In addition to reducing your outgoings and clearing debts, it’s a good idea to review the financial products you own.
“You can save plenty of money by shopping around,” says Cathy Neal, senior researcher at Which? Money. In particular, it pays to do this with your insurance.
“You can usually save money with a new insurer when you come to renew your policy,” she says. “Use a few of the comparison websites to get the best deal, as they do hold different rates.”
Comparison sites - including Moneywise's Compare & Buy service - are useful for this, but one or two players, notably Direct Line and Norwich Union, don’t put their details on these sites, so get quotes directly from them.
As well as cutting the cost of the products you use, check whether you’re wasting money paying for services that you don’t need.
“Mobile phone cover is pointless; your phone could be covered by your home insurance,” says Neal. “Likewise, ID theft insurance can cost as much as £90 a year, but it won’t stop your identity from being stolen, and if it is, you can get your money back anyway through the Banking Code.”
Also on Neal’s hit list are extended warranties, because of the small probability of actually needing to claim; excess insurance, which is designed to pay the excess on another scheme, but can cost more than it would to reduce the excess on the original scheme; and payment protection insurance, which, as well as being limited and full of exclusions, can be more expensive than income protection insurance.
Packaged products can be another unnecessary drain on your finances. For example, in exchange for a monthly fee of anything up to £17, you can get a current account with a variety of extras, such as discounted loans and insurance, travel insurance and ‘money-off’ white goods.
“It’s fine if you use these features – for instance, older people might get value from the travel insurance. But most people don’t use enough to cover the monthly fee,” says Neal. And even if you do use the features, you’ll often find cheaper and more comprehensive deals on standalone products.
GET A SAVINGS HABIT
With the base rate so low it’s easy to ignore your savings and the paltry interest rate they’ll receive. But, according to Kevin Mountford, head of banking at moneysupermarket.com, you’ll be handsomely rewarded for paying them some attention.
“Although rates are low, the gap between the average rate and the best rate is wider than ever. If you have a balance of £10,000, bagging the best rate can be equivalent to earning an extra £400 a year,” he says.
Some of the best rates are available if you’re prepared to leave your money tied up for a year or more. But Mountford says it’s not necessary to lock up your money. “Instant access accounts have become much more competitive recently,” he says.
Also, use your tax-free cash ISA annual allowance, if you haven’t done so yet.
Falling house prices and the credit crunch have taken the sheen off the property market, but for many homeowners the current market conditions offer fantastic opportunities.
“A sizeable minority of people will be on deals that allow them to take advantage of the low base rate,” says Boulger. These include people on base rate trackers, as well as those with low standard variable rates.
“These people are in a great position to overpay,” says Boulger. “But this is only worth doing if other more expensive debts such as credit cards are cleared first. Additionally, it’s much harder to borrow now, so if you’re planning a major purchase in the next few years – for instance, a new car – you might prefer to put the money into savings so you can access it later.”
However, overpaying can seriously reduce your mortgage term. As an example, a couple borrowing £150,000 on a 25-year tracker repayment mortgage at 1% above base rate would have been paying £966.45 a month last July when the base rate was 5%.
A year later, with the base rate at 0.5%, their monthly repayments would have fallen to £599.90. Overpaying by this amount – an extra £366.55 a month – would reduce their mortgage by more than 10 years and save them more than £130,000 in interest.
Lower property prices are also good news for those trying to buy their first home. But, although affordability is less of an issue, it’s still not easy, says Boulger. “The big problem is finding the deposit,” he explains. “The best deals require a deposit of at least 25%.”
Parents and grandparents are helping with this – figures from the Council of Mortgage Lenders show that around 80% of first-time buyers under the age of 30 had help from their parents.
On the positive side, first-time buyers hold fantastic bargaining power in the current market.
Read our guides to getting - and moving up - the property ladder
PAMPER YOUR PENSION
Focusing on your retirement plans could be another way to avoid the current doom and gloom, especially as now could be the perfect time to pay into your pension. “The stockmarkets are at a low point,” says Laith Khalaf, pensions analyst at Hargreaves Lansdown. “They could go lower, but it’s a fantastic time to invest compared with 18 months ago.”
He recommends directing any spare cash, perhaps freed up as a result of reduced mortgage payments, into your pension. In addition to benefiting from future growth, tax relief on pension contributions will top up the amount you pay in by 20% for basic-rate taxpayers, or 40% for those in the higher-rate band.
As an example, if you have a £100,000 variable rate interest-only mortgage and the base rate cuts have been passed on, you could save £4,833 in mortgage payments between October 2008, when the first cut was made, and January 2010 – assuming there’s no change in rates.
“Pay this into your pension and it will be increased to £6,041 with tax relief. After 25 years’ growth at 6% a year this would be worth £25,536, which would buy a 65-year-old man an annuity paying £1,849 a year,” explains Khalaf.
Find out how to keep your retirement plans on track
INVEST FOR GROWTH
The ‘buy low, sell high’ mantra also holds true for your investments, and with markets still depressed, now could be an excellent time to top up your portfolio.
“Although equities have performed well in the last couple of months, there’s a sense that they will go higher in time,” says James Davies, investment research manager at independent financial advisers, The Chartwell Group.
Given current market conditions, Davies believes that it might be worth considering investing in a recovery fund. As the name suggests, these funds invest in companies that are in difficulty or out of favour but are showing signs of recovery. Among his recommendations are Investec UK Special Situations, BlackRock UK Special Situations and M&G Recovery.
“If you’re bolder you might want to go for a smaller companies fund,” he adds, recommending the Standard Life UK Smaller Companies fund and Old Mutual UK Smaller Companies. “There is a greater risk that small companies won’t survive the recession, but it’s during the downturns that the smaller company stars begin to emerge.”
Davies also recommends drip-feeding your money into the stockmarket with a regular savings plan. “This allows you to benefit from a volatile market, as you buy more units when the price is low,” he adds.
RETIRING IN A RECESSION
Among those badly hit by the recession are people in retirement. Although any income you may have from an annuity will be fixed, if you’re relying on your savings to supplement this, the falling interest rates could leave you short.
“It’s difficult,” says Bob Perkins, technical manager at Origen Financial Services. “If you don’t want to take any additional risk, then all you can do is make sure you’ve got the best rate. If this isn’t enough, you’ll need to take some risk to increase the level of income.”
Structured products are an option. While these present a risk to capital, this is often linked to a significant fall on the stockmarket – which might not be so likely, given current market levels.
Another option open to people in retirement is equity release. Also known as ‘lifetime mortgages’ or ‘home reversion plans’, these schemes essentially allow you to borrow money against the value of your home, with the debt repaid from the sale proceeds following your death.
Equity release can free up capital for a lump sum or regular payments, but with property prices low, the amount you’re able to release will be reduced too.
TRIM YOUR ESTATE
Falling property and share prices mean that fewer of us may have to worry about leaving an inheritance tax (IHT) bill, but for some people the recession could be a great time to undertake some estate planning.
“If you’ve got assets such as property or shares that you can afford to give away, then it’s an ideal time to do this,” says Perkins. “As values have fallen, you will be using less of the £325,000 IHT allowance (the nil rate band) if you put them into trust. Also, whether you give away these assets through a trust or directly to family or friends, any growth in value will be immediately outside your estate.”
There could also be capital gains tax advantages if you give assets away in the current climate. Although tax at 18% will become payable on any profit you’ve made if you give an asset away, with values depressed, this might not be as much as it would have been a couple of years ago, and you may be able to swallow it up with your annual allowance, which currently stands at £10,100.