Families need savings to ease pain of spending cuts

As the Chancellor swings his axe, households must assess their spending to cope with the squeeze on their finances, writes Jeremy Gates

IT’S TIME to start saving again. That was the message this week when the Chancellor ushered in a “sober decade” ahead with £81bn of spending cuts outlined in his Comprehensive Spending Review (CSR).

Millions of households face a steep drop in income – and savings painstakingly collected by older people are already being rescued.

While the bank of mum and dad gives sons and daughters a deposit for their first home, the Financial Times says some grandparents are offering to pay the child benefit which better-off families will lose from 2013 – worth £88 per month for the first child, and £57 for each subsequent child.

As the FT explains: “Up to £3,000 per year can be passed on to grandchildren without becoming liable to inheritance tax, although larger regular payments are permitted if they are made from income.”

With vouchers for Child Trust Funds set to end in January, older people are also investing in monthly investment plans, savings accounts and pension schemes for grandchildren.

By so doing, they may cut the potential inheritance tax payable on their estates when they die.

But how will the great majority of households, who can’t rely on money handed down the generations, cope with the squeeze?

Households on £50,000 a year could lose about £10,000 in the next four years.

Kevin Mountford, head of banking at finance website moneysupermarket.com, says: “The CSR will have a huge impact on consumers’ finances; purse strings across the country will inevitably have to be tightened.

“The threat of unemployment will weigh heavily on the minds of many families, working in both public and private sectors.

“While it might be too late to take out specific insurance to cover unemployment, consumers can plan to reduce the impact of a sudden loss of earnings. If you have any debts, look at ways you can pay them off or at least reduce your outgoings by consolidating existing debts.

“Consumers should also build a rainy day fund – ideally three months’ worth of earnings, but anyone worried about job security should consider increasing this amount to six months to tide them over.”

However, with the Bank base rate probably stuck at 0.5% for months to come, too much money is left in low-paying accounts.

Always check the return your money earns and know when bonus interest on new accounts is taken off.

Next, look closely at mortgages, a major outlay for most families.

As lenders chase new borrowers in a shrinking market, fixed rate and tracker mortgages are getting cheaper and fixing for five years could head off rate rises which must come eventually.

Chelsea BS has cut its three-year fix to just 3.49% and applicants with a 25% deposit get free valuation, with assisted legal fees for remortgagers. The product fee is only £495.

Ray Boulger, senior technical manager at broker John Charcol, says: “If you hold at least 25% of the equity in a home, and you are paying more than 3% on your existing mortgage, consider remortgaging.

“With many lenders willing to pay valuation and legal costs, the only stumbling block in switching is the arrangement fee, ranging from nothing to nearly £2,000.

“If you have 40% equity in your home, a tracker costs 1.99% (for two years) at NatWest and 2.19% (for life) at HSBC. With 30% equity, Woolwich’s lifetime tracker costs 2.58%.

“If you are remortgaging, and might at some stage need to move for a new job, avoid a mortgage which imposes a heavy early repayment charge.”

“Some lenders allow these mortgages to be portable, subject to meeting the lender’s criteria which might be more onerous than when you first took the mortgage out. It is generally better not to have this penalty lurking over your head.”

Next, pensions: Mr Osborne’s confirmation of the rise in the state retirement age for men and women to 66 by 2020 makes it more important than ever to build a private pension, not least to cover that gap for many workers between retirement and when their state pension kicks in.

Tom McPhail, head of pension research at financial advisor Hargreaves Lansdown, says: “We knew retirement ages needed to rise, but this still won’t be a popular move. To retire earlier, you’ll need to boost private savings.”

McPhail reckons a 55-year-old worker needs to save another £40 to £45 per month for 10 years to have an extra £6,600 at age 65.

Younger workers, in their mid-forties, might need to save an extra £20 to £30 per month in their pension pot to make up the loss.

Private pension savings, however, are fairly inflexible, because they can only be accessed at age 55. People unlucky enough to lose their jobs might want to get their money earlier than that.

Catherine Penney, vice president at Barclays Stockbrokers, says: “The rise in retirement age reinforces the need for each of us to make provisions for retirement.

“By making regular contributions to personal pensions, including self-invested ones, and ISAs which offer a tax-free wrapper and are usually easily accessible, confident investors can build up savings to supplement their core pensions and provide them with increased flexibility to move to part-time working in the run-up to retirement or possibly to stop work altogether before they reach 66.”

Andy Gadd, head of research at Lighthouse Group, a national network of financial advisors, says: “In simple terms this means individuals in their late 50s have only eight or 10 years to prepare for a delay in receiving their state pension.

“Meanwhile, younger individuals should prepare for the likelihood of getting a state pension even later than 66 in future government proposals.”

In the next few weeks, of course, consumers ought to carry out their own household CSR with websites available to keep prices of standard products as low as possible.

Areas of obvious potential saving, says moneysupermarket.com, include: credit cards (saving £258); car insurance (£237); home insurance (£127); energy bills (£300-plus); and personal loans (possibly £600 if all loans are rolled into one with Nationwide BS at 7.6% APR).

INFORMATION: Chelsea BS (0800 341 341 and www.thechelsea.co.uk/mortgages); Hargreaves Lansdown (0117 980 9926 and www.h-l.co.uk); John Charcol (0845 034 2100