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4 Simple Steps to Make Better Financial Decisions Today

4 Simple Steps Blog ImageLife is full of decisions. Some are simple and some are complex. Some are more important than others. Financial decisions have a direct impact on your quality of life. It therefore pays to get them right in every sense of the phrase.

Here are 4 tips you can use to improve your financial decision-making. Starting today.

 

Think about who you are and what your goals are

It may be a cliché to say that everyone’s an individual, but it’s also true and this individuality is reflected in the decisions we take. As well as preferences based on our personality, age also plays a role in our financial decision-making. As children our goal may simply be to save up enough money to afford a special toy. As young adults we our immediate goal may be a deposit on a flat. As we grow into maturity, caring for children and planning for retirement may become more important priorities. In order to make effective decisions, financial or otherwise, we need to understand what our aims are and whether they are short, medium or long-term goals.

Don’t sweat the small stuff – but don’t ignore it either

On the one hand, the old saying “Look after the pennies and the pounds will look after themselves” has stood the test of time because it makes a fair point. Small costs here and there can slip by unnoticed until they turn into a surprisingly large amount. On the other hand, many people lead busy lives and would find it a huge challenge to keep track of every penny they spend and on what, let alone take the time to analyse whether each and every individual purchase was the best possible deal. This is where a little common-sense can go a long way.

You don’t need to do your shopping at 4 different supermarkets to get the absolute best price on everything. It can, however, help to keep tabs on your day-to-day spending and think about where you could trim fat without too much inconvenience. For example, the savings you can make by taking a refillable bottle of water on the train to work as opposed to buying a bottle of water at the station can soon mount up and give a pleasant boost to the family finance.

Your personal wealth is your responsibility

Once you are an adult then you are responsible for your own health, wealth and happiness. This may seem like an intimidating prospect, but it can help to break it down into manageable chunks. You can create a budget so that you have more money than month. You can make notes of when financial purchases are due for renewal (anything from mobile contracts to insurance to mortgage deals ending) and find the time to look for the best deals; at least for the significant purchases. You can plan to ensure that there are funds in place to meet medium to long-term needs, whether it’s replacing big-ticket household items or funding a pleasant retirement.

Getting the right financial advice can more than pay for itself

Just because something is your responsibility, it doesn’t mean that you have to do everything single-handedly. Looking through the financial sections of the press can be a confusing and even intimidating experience for some people. Mortgage approvals, interest rates, market developments, mergers and acquisitions… -it can be a challenge to make sense of what it all actually means. Then of course there are conversations with family, friends and colleagues, some of whom may have their own advice to offer. It may be well intentioned but there’s no guarantee that it’s right for your situation. Fortunately a professional financial adviser can help cut through the headlines and jargon and tips from friends and help you to build your own plan for investing in your future. This advice can be, literally, invaluable.

Financial Tips For Debt-Burdened Graduates

Debt-Burdened Graduates Blog ImageThe late, great, Rik Mayall and his fellow Young Ones lived in a very different era from modern students.  While the trials and tribulations of house sharing may ring familiar bells, the financial landscape facing the modern student is very different to that of their 1980s counterparts, fictional or otherwise.  With universities opening their doors to new and returning students alike in the next few weeks, let’s look at the steps recent graduates can take to find their financial feet.

Understand that you are now your own family and in charge of the family finance

While parents and family will always be there for you, as a graduate you’re now a fully-fledged adult and now in charge of your own future, with all that implies.  Hopefully you will have had the opportunity to learn healthy financial habits such as budgeting, if not then the sooner you start to acquire them, the better it will be for you in the long run.

Try living like a student for a while even when you’re working

Landing your first decent job is arguably one of life’s best milestones.  Those who’ve struggled financially to get through university could well feel justified in treating themselves a bit more generously now that they finally have a regular salary. This is perfectly understandable, but also try to keep a longer-term perspective in mind.  If you can stick to living like a student for a while, you can free up your salary for other purposes, whether this is paying down debt or saving up for a deposit on a house.

Build an emergency savings pot as quickly as you can (even if you have debt)

This may seem like a topsy-turvy piece of advice, but it’s aimed at stopping you from getting (further) into debt.  No matter how great you are at planning ahead, life can always throw something unexpected your way and that something could just as easily be a great opportunity as a problem.  In either case having ready access to funds can save you a lot of hassle when life’s slings and arrows hit you.

Make sure that you are on the electoral roll

Credit checks are a fact of life these days and one of the key points of passing them is being on the electoral roll.  If you’re still sorting out your accommodation options or working in an environment where it may not be feasible to register to vote at your main accommodation (such as in a hotel or holiday park), then it is much better to be registered at your parents’ address (or the address of another family member) than not to be registered at all.

Keep on learning

If you’re a recent graduate then the chances are you have many years ahead of you and that you will see many changes during those years.  To keep yourself employable until you are ready to retire (if you choose to retire), remember to invest time and money in yourself.  Keep your skills up-to-date and work on maintaining and building your social and professional networks.  Your graduation is a huge step in your education, but it is far from over.

http://www.experian.co.uk/consumer/credit-education/electoral-roll.html

Life Insurance – A Simple Way To Save An Inheritance

Simple Inheritance Blog ImageWould you rather leave your worldly goods to your loved ones (or your favourite charity) or the tax man?

Inheritance tax has long been the subject of heated debate, but the chances of it being repealed any time soon, is very remote.  So for most people, the choice of creating a financial plan to deal with it or leave your loved ones to foot the bill is pretty important.

Inheritance Tax Is A Growing Concern

Under current rules transfers of assets between spouses and civil partners are (usually) ignored for the purposes of any tax, including inheritance tax.  Each individual can leave an estate of up to £325K to any other individual or organization before Inheritance Tax becomes payable.

Inheritance Tax is levied at a flat rate of 40% (with a reduction of 4% where the deceased has left at least 10% of their assets to charity).

Any unused portion of this allowance can be transferred to the surviving spouse/civil partner as a percentage.  For example £162.5K would be transferred as an allowance of 50% extra.  This means that the surviving spouse/partner would be able to leave a tax-free estate consisting of their own personal allowance plus an extra 50%.

Looking at these figures and comparing them with house prices, it’s easy to see that many home owners could find their estate subject to inheritance tax.

Inheritance Tax Must Be Paid Before The Estate Is Released

Upon a person’s death, their executor must inform the Inland Revenue of the value of that person’s estate.  They will then receive a formal notification of how much tax is due.  In general, this must be paid within 6 months of the deceased’s death.  If it is not the Inland Revenue will charge interest on the outstanding balance.  Although the payment can be made out of the deceased’s estate, it must be made before the bulk of the estate is released.

There is an exception for funeral expenses, although the bank or building society must agree to allow the executor access to the account.  If they do not, these can be recouped from the estate and can be deducted from its value for tax purposes.  Added together this can all mean that families who have worked hard at money management to put their family finances in good order can find themselves under tremendous financial pressure at a time when they are likely to be feeling highly emotional.

Planning ahead with the help of a financial adviser can help to minimize the stress of dealing with a bereavement.

Life Insurance Can Be A Lifeline

Life insurance can be a very efficient way to ensure that there are funds readily available to cover Inheritance Tax and funeral expenses.   Rather than naming an individual as a beneficiary of the policy, the holder can request that the eventual payout be made into a trust, held on behalf of your preferred beneficiaries.

In this way, the funds will be kept separate from your estate and can be released immediately (and relatively simply).  This can also help to ensure that a surviving partner and/or children have sufficient funds to live comfortably while probate is being undertaken.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

The Ombudsman – The Consumer’s Champion

 

 

ombudsman_blogWhile the Financial Services Authority (FSA) might have become a familiar name, it is now no more.  As of April 2013 regulation of the financial services industry was divided between the Prudential Regulatory Authority (PRA) and Financial Conduct Authority (FCA).  The Bank of England also gained direct supervision for the whole of the banking system through its powerful Financial Policy Committee (FPC), which can instruct the two new regulators.

 

The Financial Ombudsman Service (FOS) still exists and carries on in its existing role.

 

What does this mean for me as a customer?

 

In practical terms the FPC and PRA will have little direct influence on the experience of those who buy financial products.  The FPC monitors the overall health of the financial services sector and regulates it as required, while the PRA monitors the health of major banks and insurance companies and can intercede if it believes that they are acting imprudently.  The FCA is responsible for promoting effective competition, ensuring that relevant markets function well, and for the conduct regulation of all financial services firms. This includes acting to prevent market abuse and ensuring that consumers get a fair deal from financial firms. The FCA operates the prudential regulation of those financial services firms not supervised by the PRA, such as asset managers and independent financial advisers.The FOS acts as a mediator between financial institutions and their customers.

 

What exactly is the difference between the FCA and the FOS?

 

The FCA looks at how institutions manage customer service and the strategies they use to sell their products.  It may take action against any given institution if it believes that there are general failings in some aspect of its behaviour but it leaves individual complaints to the FOS.

 

The FOS is essentially an adjudication service set up by parliament to sort out individual complaints that consumers and financial businesses aren’t able to resolve themselves. It is completely free to customers and if it finds in a customer’s favour the institution must comply with its decision. However, the FOS don’t write the rules for financial businesses – or fine them if rules are broken. That’s the regulator’s job.  The FOS covers a wide range of financial institutions from the main High Street names and their products to payday lenders and pawnbrokers.

 

How does it work precisely?

 

The FOS will only take action in a case if the financial institution in question has failed to resolve a dispute to a customer’s satisfaction.  In other words, any complaint should be sent to the institution in question in the first instance so that they have an opportunity to investigate and rectify it.  They have 8 weeks in which to do so.  At that point, if the customer is still left unsatisfied by the institution’s response they may proceed to the FOS.

 

Once the customer has set out their complaint, the FOS will need to gather all relevant information in order to come to a fair decision.  Depending on the complexity of the complaint this may take anything from a few weeks to several months.  The FOS aims to be as quick as possible but also has to be thorough and fair to both parties and many of the complaints it handles require it to understand a complex set of unique circumstances.

 

Payment Protection Insurance (PPI) complaints are a typical example of this.  Once the regulator has all the facts it will take a decision and inform both parties of it in writing.  If the FOS finds in the customer’s favour, the institution must comply with the decision.

 

What happens if my complaint is upheld?

 

Basically, the FOS aims to relieve you of the impact of the institution’s failing so it will award a level of compensation which it feels will achieve this.  For example it might order an insurer to uphold a claim or a lender to refund the cost of a mis-sold product.  It is highly unusual for the FOS to award compensation for inconvenience and distress and on the rare occasions when it does so, awards tend to range between £200 and £1000.

 

While the FOS has the authority to require institutions to make payments to customers, only the FCA can levy fines or other penalties on them.  The FOS’s role is as arbitrator; regulation is a completely separate matter.

New Parents Ignoring Life Insurance

BRITAIN-ROYALS-BABY-RELIGIONHaving a first baby is a steep learning curve.  One of the first things new parents may have to learn is how they can adapt to survive on minimal sleep.  It’s also expensive.  Cots, prams, car seats and other paraphernalia all need to be bought to keep the newborn safe and healthy.  Putting these together means that new parents can often find themselves spending money and missing out on important purchases.

A Savings Account Versus Life Insurance

Parents may open some form of savings account for their new arrival.  In itself this can be a sensible option.  For example Junior ISA’s provide a tax-efficient way of saving for when your tiny baby becomes a full-size, 18-year-old.  Few parents, however, give serious thought as to what would happen to their child if they were to die in the meantime.  While it’s fair to say that we are far more likely to live to a ripe old age than, say 50 years ago, sadly there is no guarantee.  Accidents happen and so do illnesses.   Younger people can and do die, and when they do, the consequences can be particularly severe. For new parents, who are caring for a child in the most physically demanding period of its life, the death of one or more parents can be catastrophic.  Savings accounts may be a useful way of planning for the future, but life insurance will take care of financial issues in the here-and-now.

Life Insurance Needs To Change With Your Lifestyle

Parents who have bought a house prior to having a baby are likely to have life insurance already.  It’s a condition of many mortgages.  For some mortgages however, the only requirement is to be able to repay the outstanding balance.  When a baby comes on the scene, the new parents have to think seriously about how to ensure their child’s welfare in the event of the unexpected death of one or both of them.  This means thinking well ahead until the end of the child’s full-time education.  It needs to cover everything from childcare fees in the early years to school trips in later childhood and university fees in early adulthood.

Peace Of Mind Can Cost Less Than Toys

New parents may find themselves buying baby items which are hardly or even used. The cost of these items could well cover the cost of life insurance for the first year of the baby’s life.  For healthy, younger adults an acceptable level of cover could be priced as low as a few pounds a week.  This is usually more than achievable for people who exercise good money management and keep a firm grip of the family finances.  Of course, life insurance only pays out in the event of a death and since both parents will hopefully live to see their baby reach adulthood, it can help a lot to have a financial plan in place to ensure that there are funds available to them when they reach school-leaving age.  Getting advice from a financial adviser can help put your child’s future life on a solid footing before they have even taken their first steps.

Is Britain Having A Tech Boom?

 

 

Tech Blog ImageIn 2002 half a decade of heady excitement about the money making potential of the Internet came to a shuddering halt.

 

Several years of over investment, mainly in the US, and mainly in dot com businesses that looked like interesting and worthwhile projects (but seemed incapable of making any money), caused what we now know as the dot com crash.

 

It was the first major financial calamity of the internet age but it is unlikely to be the last. Ever since, whenever companies such as Facebook or Twitter have been floated on the stock exchange, financial commentators have muttered the words ‘dot com’ and ‘crash’ ominously.

 

There is good reason to be cautious with investments in new technology and online ventures; the rate of dot com failures is extremely high and for every Instagram or Facebook type business there are countless failed ventures.

 

Even with the chances of tech success being so low, it hasn’t stopped a generation of UK based start ups from helping to build a vibrant new part of the technology sector in the UK.

 

The good news for skilled IT professionals in the field is that the tech sector is keen to hire, with over a third of start ups looking for new staff.

 

It is predicted that the sector will contribute £12bn to the economy over the next decade, and the recent London Technology week saw an influx of 30,000 visitors to the capital to see how Britain’s tech sector was powering ahead.

 

This is all good news, especially if you work in the IT sector, but how does it affect the rest of the economy?

 

Global trends forecaster Oxford Economics has predicted that the tech sector could produce nearly 50,000 jobs in the next decade, which is not an inconsiderable amount.

 

Whether Britain is capable of producing 50,000 skilled ICT professionals in that time is something of a different matter.

 

If she can, then the economy will have succeeded in creating a large number of well paid, highly employable and mobile workers, which, in terms of long term GDP per capita growth and tax revenues, is gold dust.

 

At present, most of this new activity is based in the South East and London, with the North of England, the South West (excluding Bristol) and Wales lagging behind. A tech revival in Newcastle, Hull or Cornwall would provide much needed confidence and interest in marginalised regions.

 

In 2010 Tech City, the London IT sector’s industry body was established and this year it was given the remit to represent and assist tech start ups across the UK.

 

Among their initiatives is a project designed to help young entrepreneurs between 18-25 set up their own digital businesses, as well as advice on how existing businesses can grow and develop.

 

If the predictions are correct and Britain is able to compete in the tech sector in the next few decades then it’s probably wrong to think of it as a tech boom, which conjures up images of unsustainable growth resulting in collapse.

 

Instead, Britain’s economy appears to be shifting naturally into a high technology future, the question for individual investors and readers of this blog is whether or not to have anything to do with it?

 

It’s always worth considering Warren Buffett’s sage advice here, (paraphrased) ‘if you don’t know how it works, leave it alone.’

 

Or find out. Before you consider risking your shirt and backing the next Facebook (and you will quickly learn that everyone has the next Facebook), it might be worth consulting an independent financial advisor who knows the field.

 

It is possible for you to learn about the new tech industry, but even pundits who are immersed in it on a day to day basis have no idea what will work and what won’t.

 

If you do invest in technology, take a long term approach, don’t put in more than you can afford to lose and have it as but one facet of a wider investment portfolio.

Is Now The Time To Review Your Mortgage?

Modern_Housing_Estate_in_Chieveley_-_geograph.org.uk_-_39275While the favourite topic of conversation in the UK may be the weather, the housing market must certainly be hot on its heels. Whether it’s house prices, the level of deposit needed, or the ins and outs of mortgages; there’s always something to discuss.

Right now all eyes are on the mortgage-lending market and those with existing mortgages should be taking careful stock of the situation before considering what action, if any, they need to take.

The cost of paying a mortgage is set to rise

Over recent years interest rates have been held at historic lows. Without any advance indication of rises in the near future, many borrowers have been happy to take out variable rate mortgages. Those on variable deals have benefited from rates which reflected the overall trend of the market, i.e. exceptionally low ones.

Recently however the Bank of England has let it be known that interest-rate rises may well come sooner rather than later.

On 12th June, Mark Carney, Governor of the Bank of England gave a speech at the annual Mansion House event hosted by the Lord Mayor, in which he spoke of wanting to protect people from suffering when boom turned to bust. This has been interpreted as a hint that interest rates will go up. The mortgage market has been quick to respond with the rates on fixed-rate deals being increased.

Mortgages are becoming harder to get

As well as the prospect of higher interest rates, lending regulations have become tighter over recent times and may well become more so. Borrowers are now likely to find their financial situation being scrutinized like never before as lenders apply affordability criteria, designed to ensure that borrowers can meet mortgage repayments over the longer term and taking into account the possibility of future rises in interest rates.

Currently borrowers must be able to show that they could continue to meet repayments if interest rates were to rise by 3%. In addition to this, the Bank of England has also mandated a lending cap of 4.5 times income. Banks are permitted to exercise discretion on a maximum of 15% of the mortgages on their books but, by definition, this will be the exception rather than the rule. Already mortgage lending is showing signs of a slowdown with mortgage approvals in May 2014 being at the lowest level since June 2013.

While one month is a very small amount of data, it is hard to believe that the introduction of these new rules in April has had nothing to do with this. The new lending criteria apply to new mortgages issued, i.e. they will affect those remortgaging as much as first-time buyers. It is entirely within the bounds of possibility that lending criteria will be tightened still further, which is another incentive to review your mortgage now.

Now is the time to learn the lessons of the ’70s and ’80s

Only time will tell how high interest rates will go, but those with longer memories may remember the spikes in interest rates that were a feature of the 1970s and 1980s. Extended periods of high interest rates can, of course, cause a lot of pain for borrowers.

Equally, those trying to manage the family finances can be put off their stride by frequent changes in rates. They simply make it harder to budget from one month to the next. Of course everybody is an individual and will need to look at their own family circumstances and decide which of the various mortgage options are right for them.

The key point is to make time to review your mortgage situation now, so that if you decide a fixed-term deal is right for you, you will be in a position to lock in a rate before the full impact of future rises begins to be felt on the market.

 

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

The Real Cost Of Smoking

 

 

Smoking Blog ImageImagine the scene in an alternate reality; a nervous entrepreneur climbs the stairs in Dragons Den and timidly approaches the seated investors, and explains his product to them.

 

It’s a herbal preparation that, when burning, will poison the user with hundreds of toxic chemicals, it will taste disgusting, make their clothes smell, yellow their teeth and fingers, make them short of breath, and foul tempered when they don’t have one.

 

The Dragons already look baffled. Go on, they say.

 

It will lead to heart disease, lung cancer, emphysema, pleurisy, strokes, macular degeneration, and impotency; contribute to Alzheimer’s and infertility.

 

The business opportunity, the entrepreneur tells them, is that these revolting things are addictive and once a person starts to use them, they find it almost impossible to stop.

 

Mercifully sanity prevails and the Dragons declare themselves out, the new invention called the ‘cigarette’ never makes it on to the market and the world is fitter, happier and healthier.

 

In our reality (where, it must be stated, Dragon’s Den star Duncan Bannatyne is a tireless anti tobacco campaigner), people are aware of the dangers of smoking and whilst there appears to be a slow decline in new smokers, the numbers of existing nicotine addicts is still huge.

 

It would be comforting to think that if cigarettes were invented now, they would never make it to market; the recent seventh anniversary of the smoking ban in pubs and restaurants has made life far more pleasant for non smokers enjoying a drink or a meal.

 

What could a smoker have saved in that time however? The one piece of arithmetic that every nicotine addict dreads is calculating the opportunity cost of their addiction, which in recent years has become a truly expensive vice.

 

According to The Guardian, the average price of a packet of cigarettes is £7.46 and assuming that the average smoker lights up twenty times a day, the cost over a year will be £2,723, but a heavy smoker on 30 a day will be incinerating £4084 each year.

 

Not only are most heavy smokers ensuring that they won’t make it to retirement, the £2 – 4,000 a year that they are handing over to tobacco companies could have made that retirement very comfortable.

 

Assuming that on cash invested a meager 2 percent interest is available; two decades of smoking 30 a day at today’s prices will deprive a smoker of a potential £100,230.92.

For a smoker with 20 years of working life left (which is always a big if) the benefit of giving up today could be a lump sum large enough to pay off an existing mortgage or buy a second holiday property.

 

The figures quoted above would be enough to pay for a top of the range Jaguar XKRS, a car almost exclusively driven by people having some fun with their nest eggs, or it would fund as much luxury travel as you can imagine.

 

Of course none of us can put a price on good health, this is something that is absolutely invaluable and it is always the best reason to stop smoking.

 

Insurers will always try to place a monetary value on good health and non smokers will attract lower health insurance and life insurance costs compared to their wheezy counterparts.

 

Finally, if you are an employer, it’s worth considering helping your staff to quit smoking, as recent research shows that the addiction costs the economy billions in lost productivity every year.

Patient Capital

 

 

Patient Capital ImageWhat do the Clifton Suspension Bridge, Cardiff’s Docks and the Suez Canal all have in common?

 

Other than the massive utility and the long term value they have brought to local, national, and global economies, the one feature they all share is that in the short term, they were enormous money pits.

 

Isambard Kingdom Brunel, the builder of the Clifton suspension bridge across Clifton Gorge near Bristol died before the bridge was completed, but it was decades before it paid for itself.

 

The Marquis of Bute poured millions into creating the biggest coal port in the world, and like Brunel, was long dead before it made its money back.

 

In many instances, the spirit of these Victorian gentlemen capitalists also appears to have expired, or so says entrepreneur Luke Johnson, who recently argued at a Quoted Companies Alliance gathering for more ‘patient’ capital.

 

Johnson, whose successes include Pizza Express and Patisserie Valerie, has said that hedge funds that invest in businesses and then divest within a matter of months should not be classed as investments at all.

 

Patient investors, Johnson believes, invest in businesses for the long term; experiencing losses or low returns in the interim while the business grows.

 

A long term approach where investors are involved for years instead of hoping for a short term share price hike before exiting with a profit is essential for the development of business and the growth of the economy in general.

 

Johnson argued that businesses stand a better chance of survival when accessing capital if they become PLC’s and sell shares to the general public, than if they accept the private equity deals they are often presented with.

 

From the point of view of the economy at large, there is much to be said for Johnson’s views, and investors don’t have to be quite as patient as the Victorian gentlemen capitalists in order to see a return on their investments.

 

In his final point, Johnson encouraged the public to buy shares in up and coming companies; most of the main share offers that small investors participate in are giant flotation’s like the Royal Mail or the AA.

 

From the perspective of the small investor, buying shares in a small but growing business might seem more risky and difficult, but with some independent help it could prove to be a valuable part of an investment portfolio.

 

Finding a fund that invests in a range of new and growing businesses may help to spread the risk, as well as putting some of your investment capital into more established fields.

 

As with all investing, there is inherent risk, no business, great or small is guaranteed to be successful; but a business with the capacity for growth in the long term is certainly worth owning even a small share of.

 

Whilst investment is all about self interest and the balance between risk and reward, there is something to be said for the greater social ‘good’ that long termism engenders.

 

Some funds are simply interested in riding the short term wave of share prices, and this prevents the kind of growth that boosts employment, contributes to the tax base and makes society function.

 

There is, therefore, another kind of investment that all share buyers can engage in; a long term investment in the society around them, and it’s an investment that will almost certainly pay dividends in the long run.

House Prices, Pensions and the Recovery

 

 

Aug Economic Review ImageIn the past few months the clouds have parted, the gloom has lifted, and Britain is booming. Unemployment is down, investment over the past three years is up, and all is well. The recession is over and as a result there is a plausible feeling in the air that no one needs to worry about anything.

 

The relentless upbeat forecasts, and the fact that a general election is now ten months away, are in no way connected and merely coincidental; after all, with things being so positive, why wouldn’t the government want people to know the economic bad times are behind us?

 

Of course there are hidden dangers in our currently bullish outlook on the state of the country, the main one being our collective temptation to go back to the good old days of 2007.

 

Much of the rhetoric coming from the media in the past few months has been based around the notion that the tough times are over and that we will be able to enjoy life the way we did before the crisis.

 

This, as many of us know, is a fantasy, which isn’t to say that we must exist in penury for ever more, but the patterns of spending and borrowing that developed between 1997 and 2007 are a luxury that none of us can afford.

 

If the country really has economically recovered (something that none of us can really take for granted), and if it is a recovery that can sustain itself in the long term (again, questionable), we must still accept the extent to which our individual and national circumstances have changed.

 

Housing, pensions, and savings are key areas where it is essential to be vigilant; economic confidence should not translate into complacency.

 

Housing

 

Britain is experiencing a housing boom not dissimilar to the one that reached its peak ten years ago.

 

At about the time Sarah Beeny and Laurence Llewelyn-Bowen dominated the TV schedules with property makeover TV, the rest of the country was obsessed, Dutch tulips style, with their ever increasing property prices.

 

A few savvy investors saw the housing boom for what it was; an opportunity to buy cheap, sell high and get out of the market as quickly as possible before it imploded.

 

Many others, less experienced and more trusting, who borrowed their way into negative equity,  (when the value of their new home nose-dived) were stuck with huge repayments and a property that had been over valued.

 

George Osborne, in need of something to kick start the economy after the effects of his post recession austerity hit home, chose the property market.

 

The Help To Buy scheme, originally intended to assist first time buyers get a foot on the property ladder, offered them a loan, in addition to a minimum 5% deposit, of up to twenty percent of the value of a new home up to the price of £600,000.

 

Previously, getting together a 25 per cent deposit on a home had been challenging for most medium income families, but finding 5 per cent was much more realistic. The scheme began to overheat the housing market, particularly in the South East, once it was rolled out to home movers as well as first time buyers.

 

The possibility of purchasing properties well beyond ones’ means quickly developed; which was exciting news for the impulsive and naive, but now presents the rest of Britain’s home owners with something of a quandary.

 

In a bid to slow down the housing market, in April this year the government imposed strict new lending regulations on banks and building societies, ensuring that borrowers would have to prove they had a saintly credit history and minimal debt commitments, as well as assessing overall affordability including a “stress test” in the event of interest rate rises.

 

Strict limits on the amounts that could be borrowed were imposed as the government struggled to rein in the housing market that looked in imminent danger of spiraling out of control.

 

Perhaps the biggest challenge to home owners, however, is yet to come. The Monetary Policy Committee of the Bank Of England, led by Governor Mark Carney, have been debating the issue of a rise in the base rate of interest for the last twelve months.

 

As the economy improves, the historically unprecedented 0.5 percent base rate of interest that has kept the country from collapse for the past half decade looks set to be increased. Carney, is his recent annual Mansion House speech, strongly hinted at a forthcoming rate rise.

 

This might be bad news for home owners as more of their available income is sucked up into mortgage repayments, but it also means that the urgent task for most people is to renew or to move onto a fixed rate mortgage deal.

 

The banks, predictably, have started to put the costs of their fixed rate mortgage deals up, knowing that there will shortly be a surge in demand for such products.

 

The combined effect of potential rate rises and new restrictions seems to have temporarily taken the heat out of the housing market, but how long this will last for us uncertain.

 

Pensions and Savings.

 

For some, Mark Carney’s words will be gratefully received; an interest rate rise for savers will be not dissimilar to the first drops of rain after a long drought.

 

Since 2008, savers have seen precious little return from their nest eggs and, not unreasonably, have felt that the low interest rates have penalised them unfairly.

 

Savers, after all, have been prudent with their money and much of the reason for the nation’s current straightened circumstances is down to excessive and imprudent spending and borrowing.

 

Pensioners and older people who have used the interest on savings to pay for day to day expenses have experienced a significant shortfall in their financial wellbeing in the past half decade.

 

Interest rate increases in the coming year might only be marginal but for savers they will be a step in the right direction.

 

Throughout the recession, pensioners have seen their primary source of income, their pension, affected by the crises in the annuities market.

 

The slump in annuities meant that low returns on pensions became widespread, which in part explained the widespread jubilation when the Chancellor of the Exchequer made annuity policies non-mandatory for a range of pension types.

 

The Daily Mail recently reported that pensioner’s incomes have only just started to rise above the rate of inflation for the first time since 2011.

 

On average, pensioner households were receiving £503 a week in 2009; an amount that had decreased to £477 a week by last year. The figures, compiled by the Office Of National Statistics are a retrospective analysis of income so 2014 figures have yet to be calculated.

 

The Future

 

The brief boom that the government unleashed in the housing market will probably taper off in the next two years.

 

Strict lending limits and a rising cost of borrowing will allow a degree of sanity to re-establish itself; though this will mean that prices will probably remain both high and stable as fewer people are able to borrow beyond their means.

 

Savings will also become better rewarded as interest rates rise, but much of this rests on the future performance of the economy.

 

The fall in unemployment is in large part due to an increase in zero hours contracts, freelance work, part time hours, and low wage jobs; the government describe this as workforce flexibility but for many it is a precarious existence.

 

A low wage economy with high property prices and an ever shrinking welfare safety net tends to lead to an increase in consumer borrowing to make ends meet, and inevitably to defaults and a credit crisis somewhere down the line.

 

The impact of a departure from the union of Scotland, which may still happen in September, might also cause major disruptions to the economy, as would the possible departure of Britain from the European Union.

 

These wild card factors, along with our current hyper-flexible and insecure working population, make it too soon to say whether or not we have got a lasting and robust recovery.

 

If that recovery is derailed, the Bank Of England will very quickly retreat from plans to put the rate of interest up.

 

In the long run an interest rate rise is probably the healthiest thing for the economy, incentivising saving and cooling a super hot housing market are both worthwhile objectives.